Good morning, Everyone
My goal is to explain inflation to you in a way that you’ll understand and help you protect against it. There are a lot of definitions for defining and viewing inflation, like PPI and RPI, but that’s for another time. Today, I’ll be discussing inflation mainly as a concept and what it means for you and me.
Simply, Inflation is the rise in an overall level of prices for goods and services consumed by households.
What does that even mean?
Well, The Bureau of Labor statistics every month tells us the inflation reading compared to the last month. (The most common metric is CPI which is the consumer price index) They measure this by looking at the costs of things like food and electricity. Some are more apparent than others, but I’ll link the complete list here. The government’s benchmark is to keep inflation at around 2% annually. But over the years, that compounds, and it is why a Big Mac at Mcdonald’s in the ‘70s was only $0.65.
If you were born anytime in the last 30 years, inflation has never been a real threat until now. Looking at the chart below, you can see that since March 2020, inflation has literally skyrocketed to levels not seen since 1981. According to the Federal Reserve, inflation has Supposedly Peaked at 8.5% in the latest march reading. (they’re United States’s central banking system) But that has yet to be seen.
The Wage Price Spiral
It doesn’t only get more expensive for you and me to buy things. But it gets more expensive for business too, and that’s where we can get into trouble. The wage-price spiral is an economic term that describes how price increases result in higher wages. When employees get paid more, they buy more goods and services. This demand causes prices to rise. The wage hikes effectively increase the cost of business, and that’s passed on to the consumer by higher prices. A never-ending loop of higher and higher prices. This is what the government is trying to avoid, but with all of the stimulus, our markets have been fed (Remember the stimulus checks we got in 2020?) It’s obviously gotten more expensive to live in the past two years.
How can you protect yourself from rising prices?
There are many methods people use to mitigate the pain of inflation, but here are two simple ways that might help you:
Invest in Assets
Assets are things like Stocks, Bonds, Cryptocurrency & Real-estate. Remember how I mentioned that people got paid more money, and in turn, they spent more on goods and services? Many people also put that money into the stock market, causing the prices to go higher. This isn’t advice that you should try and time the market. But a rule of thumb is that it’s always good to have some sort of protection against inflation.
2. Invest in yourself
The most under-rated investment you can make is yourself and your preparedness for uncertain economic times. Simply knowing what you're up against and having a plan to protect yourself will go a long way to secure your financial freedom.
That’s all I got for today, folks. Comment on the substack app for any money-related topics you’d like us to cover. Tune back in tomorrow and as always, feel free to share if you enjoyed :)
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