Perhaps you could clarify your definition of inflation. As I have not read "The Economist Numbers Guide", I can't say in what context they meant by comparing t

Perhaps you could clarify your definition of inflation. As I have not read "The Economist Numbers Guide", I can't say in what context they meant by comparing the inflation rate to an annual compound interest rate. We need not necessarily be suspicious of the Fed, however, in devaluing fiat currency. It might be easier to think this if you think of interest rates and inflation differently. Interest rates set by the Fed, like the federal funds rate or the discount rate, and inflation are actually negatively correlated. That is, the lower the interest rate, the higher the rate of inflation that will ensue as the monetary supply expands and more goods/services are produced. This is the rationale behind our low interest rate during the recent recession. The interest rate is more of a price on the available credit. A low interest rate makes borrowing more attractive, and thus investing into a new project (rather than borrowing on consumer credit for mere consumption like jewelry or a mortgage for a house that you can't afford) will increase. Instead of thinking of interest and inflation solely as finance charges, think of them as prices of credit/investing and controlling supply/demand of goods in the macroeconomy. So making the comparison between the Fed and JP Morgan or any private bank in terms of interest rate charging and inflation is misleading. Private, publicly traded banks have the sole goal of high returns to their shareholders. It may help to understand the calculation of the inflation rate as an interest charge, but the intention of the inflation target and the federal funds rates is markedly different than that of private banks. The Federal Reserve is trying to balance inflation with national economic growth and security, and it is a fine line to walk. And in response to Rothschild, while monetary policy is a powerful tool to regulate the economy, we also have the mechanism of fiscal policy, i.e. government spending in infrastructure and national programs. Fiscal policy is more of a clunker in terms of being slower, since it requires political will of a heterogeneous group of thinkers, but it does present an alternative to pure monetary policy. (When I say monetary policy, I mean anything a central bank does to regulate the amount of currency circulating outside the reserves).