Tell your friend there’s no need for embarrassment. People stress about inflation, but ask them to explain how it actually works, and that gets a little hazy.
Okay, cool. The friend—c’est moi! What do I need to know?
In a nutshell 🌰 Inflation is the rate at which the costs of goods and services increase over time. It gets a bad rap, but a modest level of inflation (around 2%) is a good thing.
As the economy grows, businesses and consumers have more money to spend. That means higher demand, which leads to higher prices. Over time, wages should rise along with inflation (since the price of labour should increase with everything else).
Unfortunately, this recent inflationary spike — to almost 7% — has been too sudden for many salaries to keep pace. So, people are feeling it whenever and wherever they spend.
How do we fix it?
Governments can heat up or cool down the economy by raising or lowering interest rates, making money more or less expensive to borrow. There are other issues that impact inflation, too, such as global supply chain flows and geopolitics.
Okay, okay… Do you like burgers?
Welcome back. The Big Mac Index was invented by The Economist as a more digestible way to explain the purchasing power of a dollar around the globe. In 1986, a McDonald’s signature sandwich cost $1.06. In 2022, you need $5.65 to buy the same burger.
Inflation makes your dollar lose value over time. As the price of ingredients, real estate, employee wages, and transportation go up, the power of your dollar goes down. It’s one reason people work to grow their money in the markets, instead of holding it all in a savings account. Because on its own, a dollar today’s worth a little less tomorrow.
Can I get a side of fries with that?
Whoa, Rockefeller! Potatoes average an inflation rate of 4.58% per year…