ALB Finance

First things first, inflation has two definitions:

1. Inflation is the increase in prices over time
2. Inflation is also the decrease in the purchasing power of your money

I’ll explain these for you further (with examples) and hopefully that will help!

1. A gallon of gas in 2000 was $1.51 and now it’s well over $3. The gas hasn’t changed, and the amount hasn’t changed (it’s still a gallon). The price, however, has doubled. This increase in price over time is called inflation. 
2. If you had $10 in 2000 you could buy about 6.5 gallons of gas. If you have $10 in 2023 you can’t even buy 3 gallons of gas. This means the value of your dollar and how much you can purchase with it has decreased over time. 

Finance Foundations

Let’s say you have one whole pie and you cut it into 4 pieces. Each piece is 1/4 of the whole pie. Now you cut a whole pie into 8 pieces. Each piece is 1/8 of that whole pie, and so even though you have more slices, each slice is smaller. When the U.S. Treasury prints more money, there are more dollars or ‘slices’, but the whole pie is the same size. This means that each individual dollar or ‘slice’ is smaller. 

Maybe before, when slices were 1/4 of the whole pie, one slice of pie filled you up. Now that slices are 1/8 of the whole pie, you need two slices to feel full. Just one piece doesn’t cut it any more. 

If each slice is 1/16 you’ll probably still be starving after eating one! Someone might say to you “But you still ate one slice of pie! Aren’t you full? Why do you need another one?”. This person is rude. While you still technically still ate one piece of pie, it was much smaller, and getting 1/16 of pie is simply not enough! 

This may seem like a silly example, but this is one key element to how inflation works. When more money is printed, your money becomes worth a teensy bit less. If money is worth a little less, you need more of it to buy the same thing. Before, one piece of pie was enough. Now you need two pieces to feel full. If they keep cutting the slices smaller and smaller, soon you’ll need four pieces – or ten pieces! – of pie to feel full. 

If your dollars lose value, you need more dollars to get the same stuff. Bread, milk, and eggs cost about $5 in the year 2000. Today, bread, milk, and eggs cost about $10. That means that you will pay double the price for the same exact groceries in 2023. 

Time for a realistic example! 

Let’s say Suzandra is making $50,000 a year working at a Car Manufacturing company. She’s noticed that, as of recently, groceries and gas have been getting more expensive. 

Suzandra makes about $3,300 after tax per month, which used to cover her rent ($1,800), all of her expenses ($500), groceries ($400), gas ($100), savings ($300), with some extra spending money (about $200). Let’s make a little budget below.

She was able to save some money, spend some money, and cover all of her costs. Hooray Suzandra! The problem is, this month her groceries cost $500. To make matters worse, gas for a month is now about $150. Oh! And her landlord announced that he will be raising the rent to $1,950. Does she decide to use her extra spending money to pay for groceries? Or does she decide not to save this month? Does she use her credit card and get into debt?

Well, Suzandra is a boss baddie and decides to ask her boss for a raise. Her boss loves her and agrees that her work has been fantastic this year. Suzandra’s new salary is $55,000 per year, which means about $3,600 after tax. Let’s update her budget with her new income and expenses.

Wait a second! She’s making $5,000 more per year but she has exact same stuff! Her apartment is the same, it’s just more expensive. She’s getting the same groceries, they’re just more expensive! She hasn’t been driving any more than usual, but gas is $50 more now!

The Car Manufacturing Company Suzandra works for has had to give a lot of raises recently. Their employees need more money to cover their expenses, and the Company wants to keep the employees happy. What’s more, the parts they need to make their cars are also more expensive, and it’s more expensive to make the cars now. To keep profits the same, the Company decides raise the price of their cars. They’re paying Suzandra more, but they also increase their prices to maintain their profit. 

The Company did exactly what Suzandra did – and they’re not the only ones. Now, Jimothy who works at a clothing store wants a new car (but they’re more expensive) so he goes to his boss and asks for a raise. The clothing store increases their prices to be able to pay Jimothy more. Do you see how this can roll like a snowball?

This, my friends, is inflation. Things cost more, so you need to make more money to cover those costs, and then costs rise again. It is highly cyclical, and there are few things that decrease inflation. Everything costs much more than it did 20 years ago, and in 20 years things will be much more expensive than they are today. 

Suzandra was very fortunate to be able to increase her income to maintain her same lifestyle. Sadly, this is not the case for everyone. Sometimes companies increase their prices to match inflation but don’t increase their employees’ salaries. Sometimes great companies pay their employees more and go out of business because they can’t keep up with inflation. Sometimes people who used to be able to make ends meet get behind on bills, take on debt, and default on loans. This is why inflation matters so much. When inflation increases, it has massive impact on the population, and it is incredibly difficult to control. 

I know some of these concepts can be difficult or even scary. Inflation is pretty much unavoidable, and it’s been increasing recently. So how can we protect ourselves and our families from increasing prices and decreasing purchasing value?

1. Invest your money so it grows over time
2. Ask for a raise when you can, and apply for higher-paying jobs when you’re able to
3. Focus on increasing income (new job, side hustle, investing) instead of cutting costs. So many people will tell you “Cut out Starbucks!” or “Never take time off of work!”. This is not great advice. You deserve nice things and you deserve rest. Inflation shouldn’t take that from you. If your costs are rising and your income isn’t, try to find ways to increase your income

You’re absolutely capable of fighting inflation, and as you learn more about finance, you will get better and better at it. Just reading this article is a huge step in the right direction! 

Hopefully after we’ve gone through this explanation you understand better what inflation is and how it works!

Summary:

• When prices for everyday things increase, that is inflation!
• When the same amount of money buys less stuff, that is also because of inflation!
• If you feel like everything is getting too expensive, look for ways to increase your income (if possible). For example, a side hustle, a new job, a raise, or starting a business
• Investing your saved money will grow your savings over time. This way, in a year or 5 years when you need that money, it has grown with inflation and has the same purchasing power as when you invested it