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Inflation, and How it Affects You

June 8, 2018 | By Daniel Dewitt

Let’s be honest - the vast majority of us have no idea how the economy really works, or what Keynesian economics is, the consequences of a trade war, or how inflation really affects us. And that’s ok, because our lives are busy enough just trying to get by in this economy, and not all of us have the time to earn a degree in economics. That being said, sometimes it is important to know how those more esoteric economic principles can impact our daily lives. And inflation is one aspect of economics that can directly impact you and your life.

What is Inflation Anyway?

Put simply and at its most basic, monetary inflation is when prices for goods and services rises while the value of your money decreases. For example, if bread used to cost $2 a loaf and now costs $4, but you still make the same amount each payday, you are the victim of inflation. It’s a complicated idea to grasp because we tend to think of “value” and “money” as the same thing, but they can be decoupled easily. In the case of inflation, the value of your money decreases, so it takes more money to purchase the same goods and services.

Inflation is Bad?

Sometimes. Inflation is generally considered undesirable for an economy on the whole, but is actually something that’s carefully controlled in the US by the Federal Reserve. Inflation can negatively impact certain aspects of the economy, but can also boost other segments of it. For example, it’s generally believed that China artificially devalues the yen so that it can be a center for cheap manufacturing.

Another thing to remember when it comes to inflation is that not all aspects of the economy will be effected in the same way or degree. For example, during the housing crisis of 2008, home prices dropped while gas prices soared. If you were a gas company or looking to buy property this was great for you, while if your money was in real estate or you were trying to sell your home it was a disaster.

What Does This Have To Do With Me Again?

For the average citizen, the most important impact of inflation is retirement. The economy is always in a state of slow inflation: it’s why a penny used to be able to buy a stick of gum and now can’t buy you anything on its own. And because of this, the money you save now for your retirement will fundamentally be worth less in the future.

To counteract inflation, it’s vital to never let your money just sit in your bank account. Money that isn’t being actively invested is essentially slowly losing its value because of inflation. We’ve written before about the most effective ways to save for retirement, so if you’re not sure where to start or are unhappy with how you money is currently being invested, check out that blog post. And if you’re worried about not having any money in your bank account to cover expenses in the here and now, you can always take out an installment loan for your emergency cash needs.

And That’s All?

Not quite. One thing we haven’t gone over is hyperinflation, which is when the value of a currency completely plummets and goes into free fall. Instead of a loaf of bread costing $2 and slowly increasing in price, during hyperinflation it suddenly jumps in cost to $40 overnight. This can be catastrophic for an economy, and unfortunately there’s no good way for the private citizen to prepare or protect themselves from it. Thankfully, hyperinflation in the US hasn’t happened since the Great Depression, and hopefully won’t happen anytime in our lifetime.