What Inflation Means For ...

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...YOUR BUSINESS Like many small business owners, Tom Zimmerman is scrambling to absorb higher costs without scaring away his customers by raising prices too much. He owns Spectrum Automation, a Detroit-area firm that makes parts for factory equipment, and he's trying a bit of everything. He has raised his bids on contracts he competes for, deferred buying equipment to avoid debt and just recently shelved plans to add three jobs to his 20-person staff. "I wouldn't want to hire them if I couldn't keep them," he says. With a big new deal just signed and good news arriving from his health insurer (a 2% cut in costs), he may reconsider. But Zimmerman is certain about plans to overhaul his factory's heating and cooling system to make it more energy efficient--a move that puts him in a good position to handle future energy inflation. The companies that will thrive, economists say, are those that can deflect higher prices by boosting productivity.

...YOUR SALARY One indicator that has lagged most others is the one attached to labor. Average weekly earnings rose 4% in May--not enough to keep pace with inflation. So even with a few extra dollars in their pockets, most workers have to cut corners to stay afloat. Believe it or not, economists consider this a good sign. If workers were successfully pressuring for higher wages, that would reflect an expectation of even more inflation to come and lead to a spiral of rising wages and prices. It's the job of the Fed, Bernanke has said, to use smart policy to keep those expectations in check by consistently taking action as soon as inflation starts to cut loose. "The Great Inflation of the 1970s," as he calls it, is "an example of what can happen when inflation expectations are not well anchored." So as long as we can stand a little lead in our pockets, relief may be in sight.

...YOUR DEBT

Every time the Fed ups interest rates in response to inflation, that takes a bite out of anyone carrying a lot of credit-card debt or holding an adjustable-rate mortgage--the tools that have fueled the housing boom, particularly in the big metro areas of California and South Florida. Ann Johnson, 57, a saleswoman in Kansas City, Mo., cringes thinking about what could happen to the mortgage that looked so appealing two years ago and wonders if she'll be able to sell her condo in a cooling market. "I tell my sister to keep that spare bedroom open for me," Johnson says. She also buys gas strategically on long trips to lower the cost of a tankful (hint: skip Kansas). Painful as it may be, that's exactly the effect that Bernanke is looking for. As consumers limit their spending, inflation follows suit and tapers off in turn.