Inflation – What is it?

One thing that we all know for sure is that the price of goods is going up. A gallon of milk in 2020 cost $3.32. Over the past year it increased by 6.9% to $3.55 per gallon. The increase in the cost is referred to as inflation. The Bureau of Labor Statistics (BLS) defines inflation as the overall upward price movement of goods and services in an economy. 

Often referred to when we discuss inflation is the Consumer Price Index (CPI). This is the change overtime in the prices paid for a basket of consumer goods and services. Those items fall into eight major groups; food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services.

There are a lot of factors that impact the costs of goods. Simple things like the increase in cost of labor and materials make the price go up. If the workers are paid more than the price will increase to offset the increased expense or the price of gas to transport, will increase price. Then there are more complicated issues like interest rates, government policy, and supply vs. demand. In general, an inflation rate of 2% would be considered average. Right now, the inflation rate in the United States is around 7% to 8%. For most of us, our salaries have not increased at the same rate, meaning we have less money. This is why it is important to start tracking your money.

Now I could go down the road that you need to create a budget, but I am not going to do that. Instead, I will respond with a question. When the cost of goods you typically buy (like gas and groceries) go up, where will you get the money to pay for those goods? 

The answer is you will need to increase income (money you make) or decrease expenses (buy less). Unfortunately, you’re not likely to get a raise at work that will cover the increased costs. Your other income options include getting a new job that pays more, getting a side job, or selling goods you no longer need or use. Options to decrease expenses often involve a change in habits. Some good habits include being a frugal shopper by looking for deals, eating out less, consolidating trips, and evaluating your wants vs. needs. Some not-so-good habits include not tracking your expenses, using credit cards, paying your bills from your savings, and reducing your savings. 

At this point, you may consider making some changes to your personal finances. There are lots of good materials out there. One source that I like to share is the Your Money Your Goals toolkit, by the CFPB. The toolkit includes tools and handouts to set goals, track income, pay expenses, and plan your spending.

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