The Net Effect of Inflation

Inflation is an increase in price levels of a pre-defined set of goods in an economy over a period of time. In other words, things will cost more. Inflation and the criteria that determine the causes, can keep a professor of economics busy for decades. However, I will attempt to simplify things a bit to get down to "brass tacks" as they say.

A number of key elements that go into the reported inflation rate is core inflation and the consumer price index. The consumer price index measures the price of a selection of goods purchased by a typical consumer. Core inflation is measures the same without the effect of food and energy. This is the problem I'm leading to. First, everyone has to eat, heat or cool their homes, purchase gas for their cars, etc. What is the value of a number that measures everything but? We all know that the price of gas has doubled in the last few years. What sense does it make to say that inflation has been steady at 2-3% per year? What a crock! The numbers you hear on the news will be whatever they want them to be. Another thing, who decides who a typical consumer is and what he or she buys?

The bottom line is that everything continues to costs more, quite a bit more because of the price of gas. Manufacturers and distributors have to charge more to get the products to markets because of the cost of fuel. Markets in turn charge more to make sure they stay in business and retain their profit levels.

What this all means to the consumer is simply this. If things costs more, say an average of 10% per year, but wages only go up an average of 3% per year; you have less money to buy the things you need which costs more. It's the same with investing. If you earn 6% on your mutual funds, but true inflation is 10%; you continue to lose money each year. The quick fix - credit cards! Buy now, pay later. Don't worry about it, just get it, you deserve it! This is the popular advertising message by stores and credit card companies alike. Is there no wonder the middle class is disappearing from this country? This can not continue indefinitely without consequences.

"Give careful thought to your ways. You have planted much, but have harvested little. You eat, but never have enough. You drink, but never have your fill. You put on clothes, but are not warm. You earn wages, only to put them in a purse with holes in it." Haggai 1:5,6 (NIV)

There will be more about inflation this week of Thanksgiving. Stay tuned ...