If you typed the word “inflation” into your favorite search engine, you’d get over 380 million results.
Whew. That’s a lot of reading.
Let me save you time and confusion. Here are short answers to the five most common questions people ask about inflation.
1. What is inflation?
In simple terms, inflation is when our money loses purchasing power. It’s when the price of products and services goes up.
For example, a gallon of gas costs around $4 today; it was $2.85 a year ago. Translation: Filling your tank is painful!
Economists talk about the “inflation rate.” They’re referring to the average increase in the cost of various consumer goods. For the last 20 years, we’ve had an inflation rate of about 3%. Lately, inflation has risen to around 7%.
We’re seeing rising prices on most items—houses, cars, food, electricity, lumber. However, the prices of those assorted goods don’t increase at the same rates. To understand why, we have to ask . . .
2. What causes inflation?
Perhaps an example will help. Three years ago, car dealers had plenty of inventory. You could find great deals on both new and used vehicles. Then the pandemic shut factories and interrupted supply chains. A shortage of parts and computer chips meant new cars were scarce. This sparked a huge demand for a limited supply of used cars. As a result, prices surged on all cars.
That’s what causes inflation: when more buyers are chasing after fewer goods.
3. Can we see inflation coming?
Multiple money “experts” claim they predicted this most recent bout of rising prices. “We can’t have so much government spending and not have inflation!”
The problem is these experts said the same thing about the government bailouts during the dot.com bubble of 2000-2002…and during the government stimulus spending in the housing crisis of 2008.
But guess what? There wasn’t much inflation either of those times. Now there is. Have we reached some tipping point?
I’m not a big fan of government spending. But I am a fan of facing the truth that the causes of inflation are extremely complex.
I also know the explanations for inflation are easier to identify in hindsight than they are ahead of time. That prediction stuff is tricky.
4. Why should we care?
The obvious concern for all of us is higher sticker prices on cars, groceries, electricity, and golf balls. Nobody likes that.
On the plus side, inflation generally has a positive impact on the value of your home. Many workers also see bigger paychecks due to cost-of-living increases. And higher interest rates (keep reading!) may also increase the long-term value of your investments.
5. What can I do?
Economist John Mauldin said, “The old line is that the cure for high prices is high prices. When prices rise, businesses tend to respond by producing more. If the price of something gets too high, then people buy less, which then leads to too much supply, which lowers prices. Rinse and repeat.”
The Federal Reserve has promised to tap the breaks on inflation by gradually raising interest rates over the next year. That’s their contribution to the “high prices” cure of which Mauldin speaks.
How can you protect yourself? Before you try to beat inflation by buying “inflation hedges” like gold or other commodities, get some advice. It’s possible to lose a lot of money fast.
A better solution is to control what you can control by making a solid, wise financial plan for your future. Delaying that planning process only makes it more expensive (another higher price) and less effective.
Your best defense against inflation that may linger into the foreseeable future? A comprehensive plan you put into action today.
To help you think through such issues, I’ve created a comprehensive checklist of pre-retirement questions for people who are 60-something. It’s free if you’d like a copy. Just email me at firstname.lastname@example.org, and I’ll send it to you right away.
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