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What is inflation?
In economics, inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.
People see inflation at work when they purchase goods and services and notice the price has gone up compared to last time. In truth, there is nothing individuals can do to avoid inflation since it’s systemic or part of the overall economic system. It takes policy choices at the national level to manage the causes of inflation.
Here’s an interesting inflation calculator by the Bureau of Labor Statistics where you can see how many more dollars it takes today to buy something in any given year (you enter the year in the past) … more dollars today to buy something in the past … that’s inflation’s loss of purchasing power effect.
What can a person do?
Workers tend to ask for more pay during their working years in order to be able to continue to pay for necessary expenses they have. Having to pay more to employees, may lead the employer to raise their prices. This then accentuates the rising price cycle leading to more inflation nationwide.
Lacking increases in pay, substitution of goods or services tends be be used by people (last paragraph explains more on substitution in daily life). Even reducing consumption of discretionary items happens.
While working one should continue to save for retirement (it’s a common mistake to eliminate saving, especially for retirement), and if possible even save more for retirement, which helps address inflation once retired when income options may be more limited. Why? That’s next.
Addressing inflation while retired is to have the money grow at a rate faster than inflation (at least up the retiree’s risk tolerance and capacity limit). Those historical rates compared to inflation are best seen in a publication or chart called “Stocks, Bonds, Bills, and Inflation® (SBBI®).” This is true for both individuals saving and spending money for retirement, but also pension plans and annuities.
Thus, the objective is to have your money working harder than the effect of inflation, working or retired. It’s one of the few things a person can do directly to counter inflation’s effects. The main takeaway from the SBBI graphs is that having money grow in the long term faster than the rate of inflation in the long term is how one stays ahead having more dollars to buy goods and services as prices rise over time. I always say, “the long term is the rest of your life.”
BTW, Social Security does adjust income for inflation each year.
Both working and retired people, in the longer term, need to recognize that adjustments to inflation effects are not immediate because the near-term macroeconomic effects of inflation aren’t seen until later, once they’ve been tracked by the Bureau of Labor Statistics. There’s a lag in the recognition of how fast or slow inflation grows at the macro national level. This said, in microeconomics, people make shopping decisions every day based on choices and their relative prices, (substitution above) which is the near term recognition of inflation that people have, and is what people see and always do on a daily basis … with both low and high inflating prices.
PS. Inflation is one of those things we can’t really control or avoid as individuals. How to address the effects of inflation are what are within the realm of our control through wise choices.
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