What You Need to Know About Inflation

If you've been hearing a lot of experts talking about whether inflation will rear its ugly head, you might be wondering if you should do something different with your money. 

Many economists believe that the recent higher-than-normal prices of goods and services will be temporary. When the economy is fully open, and manufacturing and shipping bottlenecks get cleared, we should see the inflation rate drop to pre-pandemic levels.

However, no matter if inflation in the U.S. is temporary or long-term, it's wise to consider what it means for your finances. This episode will review what causes inflation and tips to keep it from causing you to lose money now and in the future.

What is inflation?

First, here's a quick primer on inflation. It's a rise in the prices of goods and services over time. You've probably heard numbers like during the 1940s in the U.S. you could buy a loaf of bread for $0.15 and a new car for less than $1,000!

Here's a handy inflation calculator that allows you to adjust any amount for inflation from 1800 to the present. 

The most well-known measure of inflation is the Consumer Price Index or CPI. The CPI reveals changes in retail prices of specific consumer goods such as food, clothing, and cars. The index compares the value of the same items each year to calculate the level of inflation for that period. It's published monthly by the Bureau of Labor Statistics.

As inflation causes prices to rise, every dollar buys a smaller percentage of a good or service. For example, if the inflation rate is 4%, then a $2 loaf of bread will cost $2.08 in a year. After inflation, our money doesn't buy the same amount of goods or services that it did before. That's why people fear inflation so much. 

As of June 2021, the prices of certain products and services have gone up the most since 2009, which was about the last time I wrote about inflation! 

Over the past year or so, the pandemic created some unusual economic conditions. And while the recovery is underway, it's not happening smoothly or equally across industries. For instance, car manufacturers are still behind, but restaurants and hotels are poised for a post-vaccine boom this summer. 

The critical question is whether the current inflation rate hike will last or even increase? And how can you protect yourself from getting hurt financially by it?

What causes inflation?

Let's take a step back and talk about what causes inflation in the first place. One factor is increases in the money supply of...

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