What Is Inflation and How Does It Hurt Our Pocketbook

Every year in a normal economy you see the cost of almost everything around you become a little bit more expensive. This is inflation.

Inflation affects all of us. It can reduce the value of our savings, our earnings, and our purchasing power.

In simple terms, inflation is the general increase in the prices of goods and services over a given time.

The most widely used measure of inflation in the United States is created by the Bureau of Labor Statistics, the premier research division of the Department of Labor, which finds, creates, and publishes economic data. The Bureau’s report on inflation is called the Consumer Price Index (CPI), which is a measure of the amount of change in prices of a certain “basket” of consumer goods and services, such as costs for medical services, food, and transportation. Changes in the costs of these goods and services are usually measured over the past twelve months.  Below you can see the goods and services used to measure the CPI and the changes of the products over the last twelve months as of April 15, 2020.

Category12-month percent change, Mar 2020Category12-month percent change, Mar 2020
All items1.50%All items less food and energy2.10%
Food1.90%Commodities less food and energy commodities-0.20%
Food at home1.10%Apparel-1.60%
Cereals and bakery products0.10%New vehicles-0.40%
Meats, poultry, fish, and eggs2.30%Used cars and trucks0.10%
Dairy and related products3.70%Medical care commodities1.30%
Fruits and vegetables-1.90%Alcoholic beverages1.40%
Nonalcoholic beverages and beverage materials1.40%Tobacco and smoking products5.40%
Other food at home1.40%Services less energy services2.80%
Food away from home3.00%Shelter3.00%
Full service meals and snacks3.20%Rent of primary residence3.70%
Limited service meals and snacks2.80%Owners’ equivalent rent of residences3.20%
Energy-5.70%Medical care services5.50%
Energy commodities-10.40%Physicians’ services1.40%
Fuel oil-20.10%Hospital services4.40%
Gasoline (all types)-10.20%Transportation services-0.70%
Energy services-0.50%Motor vehicle maintenance and repair3.40%
Electricity0.20%Motor vehicle insurance1.10%
Natural gas (piped)-2.90%Airline fare-10.60%
12-month percentage change, Consumer Price Index, selected categories, March 2020, not seasonally adjusted
Information provided by the U.S. Bureau of Labor

The number given by the Consumer Price Index is essentially how much purchasing power your dollar is losing (or gaining) from one year to the next. In some years, the CPI is higher,  while in others it can be negative. Over the last thirty years the average inflation rate in the United States has been about 2.5%. If this were the rate year after year, this would mean that our cost of living would double roughly every 25 years.

Photo by Pepi Stojanovski on Unsplash

When inflation is positive or higher than expected, consumers and savers are in a losing position. While the cost of living is rising, the value of your same dollar and interest earned are falling behind what that dollar and interest value could have bought one year ago. The longer that time goes on the more that we are losing.

If you were to put $250.00 into your average savings account at 0.2% right now and let it compound annually for the next ten years you would have $255.56 at the end of that time. Yet, if you are spending $250.00 at the grocery store and the inflation rate was 5%, that same basket of groceries would now cost you $427.59. The money that you had sitting aside in a safe place actually lost $172.03 in value.

Inflation is one type of risk that can hurt our pocketbooks and eat away at our savings.

Tell me your stories and your thoughts by leaving a comment below. Let’s have a better money conversation.

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