I hope everyone’s having a great Sunday. Something that’s been hanging over my head is my worry about economic inflation within the U.S. economy and how that will impact my personal finances. As always, I’m not a financial advisor and implore you to do your own research outside of this article.
Impacts of Inflation
There’s a scene at the beginning of the movie, The Iron Lady, where an elderly Margaret Thatcher buys a carton of milk from a convenience store. As the cashier reads out the price, Thatcher is shocked at having to pay such a milk price.
We’ve all been in this scenario where we wake up one day and realize our dollars aren’t securing us as many goods as they did in the past. It’s the classic story of your grandparents lecturing you that they used to go see a movie for a quarter in theaters. The impact of economic inflation slips past our defenses day by day until we come to a sudden epiphany that inflation is eating into our daily budget.
What Is Inflation?
Inflation is the decline of purchasing power of a given currency over time. - Investopedia
There is a myriad of reasons why inflation exists. At the end of the day, either supply or demand has shifted.
Causes of inflation:
Cost-Push Inflation
Cost-Push Inflation occurs when the cost to produce a good has increased. Demand has remained the same and supply has decreased.
Demand-Pull Inflation
This type of inflation occurs from increased demand. You can see this reflected in consumer confidence when unemployment is low and wages are rising.
The Housing Market
Fluctuations in the housing market costs can be passed down to the goods needed to build homes (lumber, nails, etc.)
Expansionary Fiscal Policy
Government intervention impacts consumer demand. One example is the recent conversation around interest rates. Like #2, demand has increased which results in scarcer resources, resulting in higher prices.
Why You Keep Hearing About Inflation
Take a good look at the above four causes of inflation. You’ve most likely seen recent news headlines discussing at least one of the four.
With Biden’s expansionary policy and the Fed’s decision to keep interest rates low, the economy is being stimulated at levels not seen in decades.
This poses a dilemma as some news outlets and investors are warning of extraordinary inflation over the next decade. You can only imagine the impact this combined with the current state of the housing market and pent-up COVID spending demand will have over the next few years.
Inflation and Finances
I asked a finance expert what should I do with my money during inflationary times. He calmly said, “Keep doing what you’ve been doing. Invest in the stock market, save money, pay down debts.” This is the equivalent of saying “That’s rough, buddy. Stick it out.”
This expert’s right. There’s nothing more that we can do than keep doing what we’ve been doing. One way to personally combat inflation is to increase your income by any means possible.