Episode Summary:
In this episode, we talk about all things inflation. We dissect the concept of inflation and discuss how you can proactively respond to and mitigate current inflation. Inflation is essentially the increase in prices of goods and services, but it’s not as simple as just a percentage increase for everything. Inflation might be hidden by marketers using several sneaky tactics like “shrinkflation.” Prices are going up for many things, and we offer some advice on how to handle it.
Episode Notes:
What is inflation?
- Inflation is the steady rise in the cost of goods and services. It’s normal and part of a healthy economy. In theory, a healthy economy sees wages rise as the cost of living increases.
What drives inflation?
- Supply and demand can both drive inflation. Think of it like this: If there’s a bad harvest of oranges, the price of those oranges will go up because there is less supply. But if people go bonkers for oranges, they start to compete, which drives up prices. If any of these things are sustained, that’s inflation.
- More money can also cause inflation. If you are suddenly flush with cash from a bonus at work, you probably care less about a few dollars extra for dinner, right? We see this when the Fed pumps money into the economy for cheap. Think home mortgages.
Is inflation bad?
- Inflation is good but at a manageable pace. So right now, we’re not in what’s referred to as hyperinflation, but its ramp has been fast.
- The Federal Reserve’s main job is to control inflation, and they do this by managing interest rates. Cheap interest rates can jump-start the economy, but too much cash or for too long can cause inflation.
How is inflation measured?
- “The CPI represents changes in prices of all goods and services purchased for consumption by urban households.” – US Bureau of Labor Statistics. “Indexes are available for major groups of consumer expenditures (food and beverages, housing, apparel, transportation, medical care, recreation, education and communications, and other goods and services).”
- What inflation isn’t, though, is your everyday expenses increased by 7% or whatever the official inflation number is. If you don’t pay for rent or aren’t buying a car or sending your kid to college, your inflation number is different.
But some things I’m buying are the same price!
- That might be true. Not everything is more expensive, but most things are. Marketers are savvy, though, and they’ve tricked you. It’s called “Shrinkflation.”
- That box of cereal might still be $4, but check the weight as it’s 25% less now. The box is taller but thinner. You get more Cadbury cream eggs, but they are all smaller.
What can you do to mitigate inflation?
- The first thing is just to control your spending. The less you spend overall, the less inflation will impact you in absolute dollars.
- Shop differently. Supply chain struggles are real, so if you buy something imported by ship or air, that will see a big cost increase. So instead, shop local, shop smaller, ship items together, or wait altogether.
- Check the cost per unit. This applies mostly to food, but see how much you spend per oz or unit and compare prices that way, not by overall cost.
- Remember that inflation is a real thing that will impact your future. It’s easy to just calculate in a flat percentage increase year over year, but also think about the big purchases like houses, cars, medical care, and college.
- Lastly, just deal with it. It’s a reality of capitalism, and you’ll be ok. Control what you can control, and don’t worry about what you can’t control.
Top 3 takeaways:
- Inflation is a normal part of healthy economies.
- The inflation numbers you hear in the news are based on the Consumer Price Index and reflect the aggregate increase of all things being sold.
- Keeping your spending low is extra important now, so use current inflation as a reason to scrutinize your expenses and keep them low.
Show References: