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.

Category	12-month percent change, Mar 2020	Category	12-month percent change, Mar 2020
All items	1.50%	All items less food and energy	2.10%
Food	1.90%	Commodities less food and energy commodities	-0.20%
Food at home	1.10%	Apparel	-1.60%
Cereals and bakery products	0.10%	New vehicles	-0.40%
Meats, poultry, fish, and eggs	2.30%	Used cars and trucks	0.10%
Dairy and related products	3.70%	Medical care commodities	1.30%
Fruits and vegetables	-1.90%	Alcoholic beverages	1.40%
Nonalcoholic beverages and beverage materials	1.40%	Tobacco and smoking products	5.40%
Other food at home	1.40%	Services less energy services	2.80%
Food away from home	3.00%	Shelter	3.00%
Full service meals and snacks	3.20%	Rent of primary residence	3.70%
Limited service meals and snacks	2.80%	Owners’ equivalent rent of residences	3.20%
Energy	-5.70%	Medical care services	5.50%
Energy commodities	-10.40%	Physicians’ services	1.40%
Fuel oil	-20.10%	Hospital services	4.40%
Gasoline (all types)	-10.20%	Transportation services	-0.70%
Energy services	-0.50%	Motor vehicle maintenance and repair	3.40%
Electricity	0.20%	Motor vehicle insurance	1.10%
Natural gas (piped)	-2.90%	Airline fare	-10.60%

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.

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.

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