Girlawhirl's first impulse was to change the subject to something she could really sink her teeth into by complimenting the new Gucci handbag the woman was carrying.  But it was a business lunch, so she sputtered through an answer before moving on to the new Gucci versus last season's Gucci conversation.

Once home, Girlawhirl called Hilda Frost for some financial guidance.  What's the big deal with the Fed and interest rates and what makes it so important that the rest of the world is watching?

Hilda broke it down for Girlawhirl:

•  The Fed increases interest rates to keep inflation in check but some inflation is normal and actually needed.  Usually the Fed tries to maintain inflation at about two to three percent annually.

•  Inflation is simply a rise in prices and can also be defined as a process of continuously rising prices or a decrease in the value of money.

•  There are two indices used to measure inflation:  the CPI and the PPI.

•  The CPI is the consumer Price index, which measures how consumers experience increased prices in their everyday expenses.  There is the core CPI, which is regarded as a better indicator of real inflation because it includes increases in food and energy.  The general CPI does not include those two items but is most often quoted in the press.

•  The PPI, or Producer Price Index, measures the change in the purchasing power of the producers of goods.  It measures prices at the wholesale level.

•  The rest of the world is interested in what the Fed does because a higher interest rate decreases the buying power of our nation as a whole.

•  It is important to make sure that returns on investments are above the rate of inflation because if that is not the case, your money is actually losing value.

Like a light bulb going off in her head, Girlawhirl got it!

Go Get It!

Hilda Frost can be reached at 212 883 8566.