The economy is affected when prices for energy, food, commodities, and other goods and services rise. I remember going out to dinner with my family when I was a child, where $20 covered meals for the four of us. When I go out to dinner with my fiancé, it’s very rare that the dinner for just the two of us is $20 or under. What caused the cost of going out to eat to rise so much?
The increase in prices, known as inflation, has an impact on the cost of living. Is the impact good or bad? Well – it can be both. The economy can suffer if inflation becomes too high. With controlled, lower inflation, the economy benefits and grows. Why is this important to you? In our lifetime, there will be plenty of time for inflation to shape the economy – whether it’s positively or negatively. Learning about inflation now can give you a financial edge!
Inflation can make planning for your retirement unpredictable. In order to afford the quality of life that you initially planned for, your target goal must keep rising. You can’t simply set your retirement contribution and forget it. The cost of food, transportation and entertainment will potentially rise, which means the amount that you put away will have to rise as well to balance out.
As inflation takes effect, the wages of productive workers often increase as well, so they can maintain the same quality of life. However, maintaining the same pay of an unproductive employee as time passes is essentially a wage cut. According to the U.S Inflation Calculator, the average annual rate of inflation is around 2%. If you’re a hard worker, great! If you know you’ve been slacking a little bit, use this as an opportunity to improve and potentially get that raise you’ve been hoping for.
The opposite of inflation is deflation, which sounds really good on the surface. Deflation can result in lower prices on things, seemingly increasing the value of your money. However, deflation actually leads to sluggish sales for grocers and retailers, which then affects the share prices of those companies. The slump in the stock market has a negative effect on the economy. In the U.S, inflation rates of around two percent per year are considered healthy for the economy, as it reduces the chance of falling prices and wages.
Keep inflation in mind as you further venture into adulthood. Adjustable-rate mortgages or student loans could result in a spike in interest rates as inflation rates vary. For more on understanding inflation, watch the It’s A Money Thing video below: