Inflation Agitation

Inflation Agitation

December 14, 2021

It appears that inflation is increasing, and doing so at an increasing rate. What is inflation? In short, inflation is the increase in prices of goods and services throughout an economy. One of the best indicators of inflation is the Consumer Price Index (CPI). The CPI takes a basket of market good and services and evaluates how the total cost of that basket changes over time based on prices paid by consumers. For example, let’s say you are an extremely consistent grocery shopper and you get the exact same 10 items every week when you go to the store. You also keep all the receipts, because you are a consistent budgeter, of course. You go to the store to purchase your 10 items and the total cost feels higher than usual. In fact, it feels like the total cost has been increasing for a while. So, you head home and find a weekly grocery receipt from last December. Last year, those 10 items cost you $100. Today, they cost you $110. Your unintentional CPI experiment says that inflation year-over-year is 10%. Thankfully, current inflation levels are not nearly that high, but they are noteworthy.

                On Friday, (12/10/2021), The Bureau of Labor Statistics reported an inflation rate of 6.8% over the last year. This is the highest one year increase in the United States since 1982. The world was a much different place back then. So what does this mean for you?

Obviously, things are going to be more expensive. The BLS reports that there has been a 6.1% increase in food prices. There has been a 6.5% increase on average in electricity prices. Not only is it more expensive to feed your family, but it is also more expensive to keep the lights on at home. How, then, will Americans with small operating margins be able to stomach these rising prices? There are two ways. First, you will have to find areas where you can spend less so that the necessities can get paid for. This means spending less on entertainment and other discretionary areas that are not of necessity. The second option is out of your control and that is getting a raise at your job. Often each year salaried employees will get a raise. On paper the raise is exciting and your employer hopes it is enough to keep you working for them. However, this year, if you do not receive a raise of at least 6.8% you are actually making less money than the year prior relative to prices. It will be interesting to see how many employers will be willing or even able to give company-wide raises of that caliber to bridge the gap. Rising inflation will force the hands of many titans, including the Federal Reserve.

The Federal Reserve implemented multiple practices over that last 18 months to stimulate an economy battered by COVID-19. The Fed needed people to start spending money again, so they implemented easy money practices. Easy money policy is the increasing of the money supply, getting more money into consumer’s hands. The Fed achieved this by lowering interest rates and buying outstanding government treasury securities. Lowering interest rates made it more affordable for consumers to get loans to use on a variety of goods and services. Buying treasuries from consumers injected money from the Fed back into the market. Rising inflation means that the U.S. Dollar is staring to be devalued. The new value of goods and services added this year does not match the new supply of dollars in circulation. So, it’s very possible that interest rates could rise in the New Year and the Fed could taper back their buying practices. What about YOUR savings, the hard earned dollars YOU have stashed away?

Well, any money you have in a savings account is technically being devalued. Savings accounts offer extremely low rates of return, no-where near 6 or 7%. You will no longer be able to purchase the products and services you would have last year with that money. The money you have invested in the market is a different story. It is very possible your investments have had a return equal or greater than 6.8% this year. If this is the case, your money is keeping pace with inflation. This is a great example why keeping too much cash in savings is unnecessary. Have enough for an emergency fund and any near-future large purchase(s) you might have, but you don’t need to keep it all there.


Hopefully this blog helped answer some questions as to what kind of effects inflation may have on your life.