Inflation - What Is It?

Over the past year, you’ve probably heard the word “inflation” mentioned a few times. Ok, maybe more than just a few times because inflation has become quite the issue lately. In fact, this month, inflation hit a 40-year record of 9.1%.

The reason why I’m writing this blog is to answer the question, “what is inflation?”

Now I want to preface this by saying that I’m by no means an expert on this topic. However, I spend almost every day trying to learn more about inflation because, in order to know how to deal with it, we have to be able to understand what it is. I’m also a realtor, so I have first-hand experience with the impact that inflation has on the real estate market. Oh, and gas prices as well…

Inflation is the reason why an item that cost $1 over 100 years ago costs $17.40 today. And listen, inflation isn’t as terrible as people make it seem. We actually want inflation to be around 2% to 3% every year because it incentivizes people to spend their money, which leads to economic growth. But anything over that can be very harmful.

Let’s try looking at it in a different way. If we think about what makes gold valuable, it’s due to the fact that there’s a limited supply of it, oh, and I guess because it’s shiny. But other than that, there’s really nothing else that gives it value because there’s no practical use for it unless everything you use is made of gold.

Now, what if a meteor that’s made ENTIRELY out of gold came down from the sky?

1. hopefully, we don’t have the same fate as the dinosaurs, and 2. gold wouldn’t be worth as much because it’s no longer as limited as it used to be.

Well, the same concept applies to our money. What brings value to our money is the amount of it that is circulating in our economy. The purpose of money is to be exchanged for products and services. When the amount of money in the economy is rising at a quicker rate than the amount of products and services this results in you having to spend more money to buy that same product or service, and that’s inflation.

When we look at what happened during the pandemic, the government pumped TRILLIONS of dollars into the economy in hopes that it would keep it from going into a recession. Since the beginning of the pandemic, the national debt has risen by over $7 trillion dollars. And as a result, people had more money than usual, so what did they do with it? They spent it.

Along with sending thousands of dollars worth of stimulus to people, the government dropped interest rates to nearly 0%, which made it cheaper for people to borrow money, so that they can buy more things.

This is one of the things that caused the demand for homes to hit an all-time high and caused the supply for homes to hit an all-time low, which resulted in the price for homes across the country to rise over 20.2% in just the past year, and that’s inflation.

All of these initiatives that the government took served their purpose by keeping the economy from going into a recession, but it created something far worse, and that’s inflation.

Now granted, all of this money was vital to people that were in need of it, but it made absolutely no sense for people like myself who still had a job to receive money from the government.

People were spending money like they had an unlimited amount of it, and in a way, they did, but this could only go on for so long…This year, the federal reserve, which is the central banking system for the United States, finally decided to do something about inflation by raising interest rates.

This helps with fighting inflation because it makes it more expensive for people to borrow money. This needed to happen because if demand stayed high and supply stayed low, then the price for things would just keep rising, and that’s inflation.

It’s tough to say when inflation will hit its peak because there are many other factors that create inflation than just the amount of money that is circulating in the economy. So without there being any sign that inflation will be going away soon, the best way to deal with it is to find ways to increase your income and decrease your expenses. And listen, I understand that it’s not easy for everyone to do that, but if you manage to find a way to do so, then you’ll be thanking yourself later on.

And lastly, during an inflationary period, the price of assets such as stocks, real estate, and commodities tends to fall, so if you have enough money saved up, then this could be an opportunity for you to invest in assets that you believe will give you a return in the long run.

I know that the future of our economy appears to be grim, but historically, our economy has continued to grow even through all of the hardships it has endured. This is not the first time that our economy has dealt with inflation and it won’t be the last, so don’t worry, we’ll get through this.