On Inflation

Breakdown

Why inflation happens and what is done to combat it on a country-wide economic scale is way beyond the scope of what I feel comfortable talking about (I am much too dumb). Not to mention there’s not a thing any of us can individually do to fix it. However, what inflation is and why should I care? That I can do.

Put as simply as I can understand and convey it: the same amount of money that used to buy something, can no longer buy that same amount or same quality of thing. That’s it. Something that used to cost you $3 now costs you $3.50 and if you haven’t increased your income to offset these increased costs, everything else you can spend money on gets squeezed a little bit more.

Additionally, inflation doesn’t typically happen in a vacuum. It’s not just a gallon of milk increasing; it’s also the eggs, the chicken, ground beef, rubber, lumber, metal, Incan matrimonial headmasks, etc. Everything gets a little harder to purchase as we feel the repercussions of some piece of some supply chain somewhere getting hit by an increased cost, and… well, shit rolls down hill.

Every step your banana took - from getting cut down in some tropical country, to the vehicles that transported it to the import storage, to the vehicle that took it across the state(s), to the grocery store, to the person who stocked it - every single step was affected by the same inflation impacting us. These increased costs are funneled down the entire way until they land on our counters.

How Does Inflation Affect You?

1. Purchasing Power: The most immediate effect of inflation is the reduction in purchasing power. Simply put, your money doesn’t go as far as it used to. This can be especially hard on those with fixed incomes, like retirees.

2. Savings and Investments: Inflation can erode the value of your savings. If your savings account offers a 2% interest rate, but inflation is at 3%, your money is effectively still losing value. Luckily, as of the time of writing this - we have some awesome savings options in high-yield (online) savings accounts getting upwards of 4%. I personally use Discover’s at ~4% right now just because I’ve been with them a while but there are higher rates out there.

3. Debt: On the flip side, inflation can actually be beneficial for borrowers. If you have a fixed-rate mortgage, the value of the money you owe decreases in real terms. You're paying back your loan with "cheaper" dollars… yay.

Show me numbers

Let's say you have $10,000 in a savings account with a 1% annual interest rate. Over the course of a year, you’ll earn $100 in interest. However, if the inflation rate is 3%, the purchasing power of your $10,000 is reduced by $300, effectively leaving you with $9,700 in terms of purchasing power. Isn’t being at the mercy of something completely out of your control great?

Conclusion

That’s about it, like I mentioned earlier, inflation *waving arms around* in its entirety, is very complex and has a lot of nuance and moving parts involved. However, the actual core concept of what inflation is and how it affects everyone is a bit easier to grasp (even if it does have quite a bit of complexity when you dig into the breadth of things it affects). As far as defending against inflation goes, the best way is the same way you defend against most financial risk: diversify where your money is at if you have the ability to do so. However, most people don’t have the ability to make sure they have a nice tidy split of real estate, long-term investments, short-term investments, etc. So for most folks the answer is: deal with it and hopefully be prepared for it when it happens.

Jake

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Mandatory reminder

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