Dear Dr. Per Cap:

I hear inflation is the reason prices are rising.  What’s go on?

Signed,

Worried Budget

Dear Worried Budget

The simplest and best way I know to describe inflation is how much more you have to pay this year than last year to achieve the same level of well-being.

We all know that over time things go up in price – rent, food, cars, college degrees.  Rising prices are no joke and I’m old enough to remember when you could fill up a gas tank for ten bucks and buy a Big Mac for less than three quarters.

A little inflation is a normal part of a healthy economy, but if inflation gets too high and things get too expensive, consumers stop spending money.  This hurts the economy and creates problems for businesses and consumers.

High inflation is usually caused by a really strong economy in which consumers have lots of cash.  Everybody wants to buy stuff which creates pressure on materials and labor for goods and services as well as transportation.  Limited supply and strong demand causes things to increase in price – always has, always will.

According to the consumer price index (CPI), a common tool for measuring inflation, we’re currently experiencing the steepest rise in inflation in four decades.  CPI is a statistical gauge which calculates the price changes of about 300 common goods and services.  As of January consumer prices are up 7.5% from the year before.  That’s almost triple the inflation rate typically seen in the U.S.

This current bout of inflation is mostly the result of a strong post-pandemic economic recovery that’s gotten a little too hot.  With so many people eating out again, shopping, and traveling businesses are struggling to keep up.  They pay more for inventory and to hire employees.  Then they pass these costs onto consumers by raising prices.  The global computer chip shortage is another factor driving up prices for big ticket items like vehicles and appliances.

This all makes like tough for families who have to pay bills.  High inflation is also bad for investors because asset prices usually tumble when an economy goes south.

We’re all paying more now for everything from donuts to doorknobs with some retail stores and restaurants hiking prices by as much as 4%.  We’re also seeing fewer discounts and “shrink-flation” which occurs when products don’t come with a higher price tag but are repackaged in smaller weights and quantities.  Like a few years ago when orange juice bottles magically shrunk from 64 ounces to 59 ounces.  Talk about a day without sunshine.

Some businesses are even sneakier about passing higher costs onto consumers.  Like hotels that only change sheets between guests or cancel the free airport shuttle.  Or restaurants that tack a 3% Covid surcharge to your bill.

I think we’re going to be dealing with these higher prices for the foreseeable future.  So a good way to fight inflation is to sock away a few extra bucks to inflate your savings cushion.Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. For more information, visit www.firstnations.org. To send a question to Dr. Per Cap, email askdrpercap@firstnations.org