"I continue to believe that the American people have a love-hate relationship with inflation. They hate inflation but love everything that causes it." --William E. Simon

"Prices Keep Going Up!" Understanding Inflation and Its Impact on Your Wallet

BWe've all been there. You head to the grocery store and realize your usual basket of goods costs way more than it used to. Or maybe you're shocked by the price of gas when you fill up your tank. That, my friend, is inflation doing its thing. As economists Abel, Bernanke, and Croushore explain in their book Macroeconomics, inflation is when the overall prices of goods and services keep going up (2017). This means your hard-earned money doesn't stretch as far as it used to.

Why Are Prices Going Up?

Well, it's not always just one thing. Several factors can team up to make prices climb:

• Too Much Demand, Not Enough Goods: Imagine everyone suddenly has extra cash and wants to buy the latest gadget. But there aren't enough gadgets to go around! This leads to more competition and drives prices up, kind of like when everyone's trying to snag tickets to a popular concert, as described by Blanchard in his book Macroeconomics (2011).

• The Cost of Making Things Goes Up: Sometimes, the cost of producing goods increases. This could be due to higher wages for workers or a jump in the price of oil, which makes transportation more expensive. Companies often pass these increased costs along to consumers in the form of higher prices, according to Mankiw's Principles of Macroeconomics (2015).

• We All Expect Prices to Keep Rising: Believe it or not, our expectations can actually make inflation worse! If everyone thinks prices will continue to rise, workers might demand higher wages to keep up, and businesses might raise prices preemptively. This can create a self-fulfilling prophecy, as explained by Gordon in his research on the history of inflation (2013).

• The Government Prints Too Much Money: When the government prints too much money, it can upset the balance of the economy. There's more money available, but the amount of stuff to buy stays the same. This can make each dollar worth a little less and contribute to inflation, as explained by Friedman in his work on the causes and consequences of inflation (1963).

How Does Inflation Affect You?

Inflation can make it harder to manage your money and make ends meet:

• Reduced Purchasing Power: As prices rise, your paycheck doesn't go as far. You might have to cut back on things you enjoy or make some tough choices about your spending, as noted by Abel, Bernanke, and Croushore (2017).

• Uncertainty About the Future: It's hard to plan for big purchases or save for retirement when you're unsure what prices will look like down the road. Inflation can make it difficult to budget and make long-term financial decisions, according to Frank and Bernanke's Principles of Macroeconomics (2007).

• Distorted Price Signals: Inflation can make it tricky to figure out the real value of things. Is that new TV really worth the price, or is it just inflated? This can make it harder to make smart spending choices, as explained by Samuelson and Nordhaus in their economics textbook (2010).

• Higher Interest Rates: When prices are on the rise, lenders often increase interest rates to protect their investments. This can make borrowing money for things like a house or a car more expensive, as highlighted by Mishkin in The Economics of Money, Banking, and Financial Markets (2016).

  

What Can You Do?

While you can't control inflation on your own, you can take steps to protect your finances:

• Gain Understanding of Your "Money Mindset": Each of us has unconscious beliefs about money that were ingrained into our belief system as we grew up. Take our FREE Assessment to discover where you stand.

• Educate Yourself: Read books and articles on financial management and wealth accumulation. Participate in online and community courses about investing and saving. Freedom Financial Services offers multiple training options about how to manage and grow your money through Growth University at affordable, family-friendly pricing.

• Be a Savvy Shopper: Look for sales, compare prices, and consider buying in bulk to get the most for your money.

• Invest Wisely: Think about putting your money in investments that tend to keep pace with inflation, like stocks or real estate. Explore investment options that demonstrate low, or lower risks, but have high returns.

• Talk to a Financial Advisor: A financial advisor can help you create a personalized plan to manage your money effectively during times of inflation. Most financial advisors cater to high middle-income or high-income clients and require a minimum net worth, usually around $250,000,000 in assets to qualify for their services. If you are not there yet, seek out an advisor like those at Freedom Financial Services, whose business model permits them to serve any potential investor interested in building wealth, to advise you.

References

Abel, A. B., Bernanke, B. S., & Croushore, D. (2017). Macroeconomics (9th ed.). Pearson.

Barro, R. J. (1990). Macroeconomics (3rd ed.). Wiley.

Blanchard, O. (2011). Macroeconomics (5th ed.). Prentice Hall.

Frank, R. H., & Bernanke, B. S. (2007). Principles of macroeconomics (3rd ed.). McGraw-Hill Irwin.

Friedman, M. (1963). Inflation: Causes and consequences. Asia Publishing House.

Gordon, R. J. (2013). The history of the Phillips curve: Consensus and bifurcation. Economica, 80(319), 545-564.

Mankiw, N. G. (2015). Principles of macroeconomics (7th ed.). Cengage Learning.

Mishkin, F. S. (2016). The economics of money, banking, and financial markets (11th ed.). Pearson.

Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.). McGraw-Hill Irwin.