We all have at least a moderate grasp on what the term “inflation” means. We’ve all seen those photos on Facebook showing the prices of gasoline and other goods with prices so low that we can’t even quite comprehend it.
You could buy a gallon of gas for 40 cents?
Bread was 8 cents a loaf?
You paid $10 for a Led Zeppelin concert ticket?
Yep, that’s inflation and there are three types:
Demand-Pull Inflation occurs when there is an increased demand which drives up price.
Cost-Push Inflation happens when the cost to produce a good increases and companies producing those goods increase the price to keep their margins.
Monetary Inflation occurs when there is simply too much money in an economy, which makes the value go down.
So, the fact that bread now costs much more than a few cents per loaf can be attributed to a combination of those types of inflation. And while the general idea of inflation may be negative or neutral, it’s not necessarily always a bad thing.
For example, any of your debts owed to creditors decrease due to inflation, especially if your interest rate is lower than the current rate of inflation, which is 3%.
However, any money in your savings account, which typically have a return of 1%, lose value due to inflation. Also, if you don’t receive a raise of 3% each year, your salary is actually going in reverse.
So, what does this mean to the typical American other than finding fun in nostalgic photos? It means that if you invest your money in the stock market, which has an average return of 7%, you’re actually beating inflation. It’s also worth noting when it comes time to look at your retirement. If you wanted to put away $1 million to retire you need to think of the future. $1 million today equates to $2.5 million, adjusted for inflation, over the course of 30 years. Think of those 30 years as the amount until you retire and you can see why putting away money where it can possibly beat the rate of inflation is valuable.
Just think, 30 years from now you’ll be looking at pictures from today thinking what a great deal you got on that gallon of gas!
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