17 - Inflation Explained: Why Your Dollar Buys Less

Feeling the pinch at the grocery store and the gas pump? This episode is a jargon-free guide to inflation. We demystify what it is, how it's measured using the Consumer Price Index (CPI), and how it impacts your daily life. We'll explain the difference between "demand-pull" and "cost-push" inflation and provide practical, everyday tips for adjusting your family budget to cope with rising prices, fight back against the rising cost of living, and protect your purchasing power.

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Transcript

17 | Inflation Explained: Why Your Dollar Buys Less

00:00:00 Daniel Hill: Shanna, I think we have all heard those stories from our parents or grandparents, right? The ones about how often, when they were kids, a bottle of Coca-Cola cost a nickel. A nickel.

00:00:14 Shanna Browning: I know right? Or you see those old pictures of a movie ticket costing a quarter, and it just seems so impossible for my perspective today.

00:00:23 Daniel Hill: Oh, it really does. And you think about it, the government's not even making pennies anymore.

00:00:29 Shanna Browning: I know, no pennies.

00:00:31 Daniel Hill: It's a perfect illustration of a powerful and sometimes invisible economic force that affects every single one of us, every single day.

00:00:42 Shanna Browning: I know what you're talking about. You're talking about inflation. It's a word we hear all the time, especially when you're at the grocery store or at the gas pump. And we just all of a sudden get that feeling of just sticker shock.

00:00:54 Daniel Hill: Exactly. It's the reason a dollar today doesn't buy what it used to. Today we're going to pull back the curtain on inflation, explain what it is, and talk about what it means for your family's budget. Welcome back to Making Sense of your Cents. I'm Daniel Hill.

00:01:19 Shanna Browning: And I'm Shanna Browning. And so last week we talked about the Fed and how the interest rate decisions impact you. So today we're going to tackle the other major economic headline that dominates the news a lot. And that's the word inflation.

00:01:35 Daniel Hill: And we're going to explain in simple terms what causes it how it's measured. And most importantly give you some practical tips for managing your budget when it feels like the cost of everything is going up.

00:01:49 Shanna Browning: Everything. So let's start with the most really basic definition, Daniel. What's inflation?

00:01:56 Daniel Hill: Well, at its core, inflation is the rate at which the general level of prices for goods and services is rising. And as a result, the purchasing power of currency is falling. In simpler terms, it's the reason that one hundred dollars buys you less at the grocery store this year than it did last year.

00:02:17 Shanna Browning: So it's not just that one thing that gets more expensive. It's kind of a broad increase across the economy. And so tell me what causes that to happen.

00:02:25 Daniel Hill: There really are two main types of inflation. The first is called demand-pull inflation. This is the classic too much money chasing too few goods scenario.

00:02:36 Shanna Browning: All right. You got to give me an example.

00:02:38 Daniel Hill: Okay. Here's an example. Imagine every one in the country suddenly gets a lot of extra money, maybe from a government stimulus program or a booming stock market. Everyone feels a bit richer, so they all decide they want to buy a new car or a new TV, or go on vacation at the same time. But the number of cars, TVs and hotel rooms that are available hasn't changed.

00:03:03 Shanna Browning: So you have search and demand, but that supply is fixed.

00:03:07 Daniel Hill: Exactly. And when demand outstrips supply, sellers can and do raise their prices. That's demand-pull inflation. The second type is called cost-push inflation. This happens when the cost to produce goods and services goes up.

00:03:23 Shanna Browning: And what causes that to happen?

00:03:25 Daniel Hill: Well a common cause is a disruption in the supply chain. For example, if a bad harvest makes wheat more expensive, the cost to produce bread goes up. The bakery then has to pass that increased cost onto its customers by raising the price of a loaf of bread. Or if the global price of oil spikes, the cost of transporting all goods goes up, which eventually leads to higher prices on store shelves.

00:03:50 Shanna Browning: So much happening in all of that scenario, right? And sometimes I'm guessing you have both types of inflation that can happen at the same time, which can really create a challenging environment for us consumers.

00:04:01 Daniel Hill: That's exactly what we've seen in recent years, a combination of strong consumer demand and significant supply chain issues, which led to a rapid increase in the overall cost of living. When we see a headline that says inflation rose by three percent last year. Where does that number actually come from?

00:04:19 Shanna Browning: Don't we see that a lot? And we see those headlines a lot. The number comes from what we call the consumer price index or the CPI. So the CPI is mostly used as a measure of inflation. And it's calculated by the US Bureau of Labor Statistics.

00:04:36 Daniel Hill: A lot of words.

00:04:36 Shanna Browning: A lot of words.

00:04:38 Daniel Hill: How exactly do they calculate it. I mean, it seems like it would be impossible to track the price of everything.

00:04:44 Shanna Browning: And you're right. It is and it is, and it would be. So what they do is create a market basket of goods and services that represents what the average urban American household buys in a given month.

00:04:57 Daniel Hill: Okay, so here's the million dollar question Shanna, what's in the basket?

00:05:01 Shanna Browning: Well, as you suspect and are probably thinking, it's a huge and very diverse list. So it includes everything from a price of a gallon of milk and a pound of ground beef to the cost of a gallon of gasoline, a used car, a doctor's visit, a haircut, haircut. And then also the cost of rent. So there are thousands and thousands of items in that basket. Grouped into major categories like food, housing, transportation, and health care.

00:05:30 Daniel Hill: So then each month they send people out to survey the prices of all these items. Over all the country.

00:05:37 Shanna Browning: That's exactly right. And they collect tens of thousands of price points. Then they compile all of that data to calculate the total cost of that market basket for the month. So the inflation rate is simply the percentage change in the total cost of that basket compared to the same month in the previous year.

00:05:59 Daniel Hill: Wow.

00:06:00 Shanna Browning: Uh-huh.

00:06:02 Daniel Hill: So if the basket costs a thousand dollars to buy last year and it cost one thousand and thirty dollars to buy this year, that's a three percent inflation rate.

00:06:13 Shanna Browning: And there's your headline, right. There's your your percentage rate. So that's it in a nutshell. But now it's important to remember that the CPI is an average. Your personal inflation rate might be a little different if you don't own a car. A big spike in gas prices won't affect you that much if you have a fixed rate mortgage and not a variable rate. As we've discussed, a rise in housing costs really won't hurt your budget either. But the CPI gives us a very good general sense of the direction the cost of living is heading. All right, so Daniel, this is the most important part of the conversation. We understand what inflation is and now we understand how it's measured. But what can we actually do about it when it feels like it affects us every time we go to the store?

00:07:03 Daniel Hill: Well, that really is the challenge, because your income might not be rising as fast as your expenses are. The first and most important step is to go back to your budget and get a clear picture of where your money is going. You need to identify which categories have been hit the hardest.

00:07:24 Shanna Browning: So for most people, I would think that's going to be what we call the big three, right? Your groceries, your gas and your utilities.

00:07:31 Daniel Hill: Exactly. And once you've identified those areas, you can start to get strategic. For groceries, this is the time to lean into classic money saving techniques. Plan your meals for the week before you go to the store to avoid impulse buys. Look at store brands instead of the name brands. The quality, honestly, is often identical. And take advantage of loyalty programs and digital coupons. I remember my mom would have a stack of coupons every time we go to the grocery store, and I felt like she was always scanning more coupons than groceries. Yeah, but but it worked. It does work. So use those loyalty programs.

00:08:13 Shanna Browning: That's right. And for gas, it might mean consolidating your errands into one trip instead of making several. And then for your utilities, it's about being more mindful of your energy consumption, right? Turning off your lights, adjusting the thermostat by a degree or two. These small changes can really add up.

00:08:31 Daniel Hill: The second major strategy is to review your wants, specifically your reoccurring subscriptions. Go through your bank statement. Make a list of every monthly subscription you're paying for streaming services. Gym membership. Subscription boxes. Ask yourself for each one. Am I getting enough value from this to justify the cost right now? I mean, you've got a streaming subscription and you watch one show right on that streaming subscription. Are you really getting the value of it? Is it worth twelve dollars a month to watch one show? Correct. You know, you might find some easy wins there.

00:09:10 Shanna Browning: Yeah, I totally agree with you. And it's also a really great time to negotiate. Right. So most people don't realize that you can often call your cable company, your internet provider, cell phone provider and just ask if you're on the best plan possible, or if they have any new promotions available. They're not going to tell you no.

00:09:29 Daniel Hill: You got to ask.

00:09:29 Shanna Browning:   You got to ask. So a ten minute phone call really could save you maybe twenty or thirty dollars a month.

00:09:36 Daniel Hill: And finally, on the other side of that equation, this is a powerful motivator to look for ways to increase your income. This could be a perfect time to have a conversation with your boss about a raise, especially if your job responsibilities have grown.

00:09:51 Shanna Browning: Haven't we all? Mhm. Yep.

00:09:53 Daniel Hill: Or it could be a good time to consider picking up a side hustle to bring in some extra cash to offset the rising costs.

00:09:59 Shanna Browning: Well, and I really think it's just it's this is practical advice and it goes back I think hitting these three points of, of ways to save money and look at things, it goes back to our conversation also about budgeting. Yes. Right. I mean, it's always about find your budget. You have to adjust your budget to what inflation does.

00:10:16 Daniel Hill: Exactly.

00:10:17 Shanna Browning: So I think if you're taking control where you can in an environment that really can sometimes feel out of your control, and that's what brings us to our actionable tip.

00:10:30 Daniel Hill: Your action item for this week is to become an expert on your personal inflation rate. We want you to do a then and now comparison.

00:10:41 Shanna Browning: So go back in into your mobile app or your statements, and we want you to find a receipt or a statement that says from a month or two ago, if you don't have a paper, one look in the grocery store's app or your email. Your task is to pick five staple items that you buy regularly gallon of milk, a dozen eggs, a loaf of bread, your favorite coffee, a pound of chicken or beef.

00:11:05 Daniel Hill: Then what you're going to do is you're going to write down what you paid for those five items back then. The next time you're at the grocery store this week, find those same five items and write down what they cost now.

00:11:20 Shanna Browning: And it's a really simple exercise that does two really important things. First, it makes the concept of inflation real and personal, because you're seeing it and you're going to see how it affects your budget. Second, it makes you a more conscious shopper. The act of paying close attention to prices is the first step toward finding deals. Using those coupons and making more strategic purchasing decisions.

00:11:45 Daniel Hill: Absolutely. And it will help you immensely. Yes it will. Just to get a picture. Of what? Of what's going on. Well, Shanna, that's all the time that we have for today. Next week we're going to talk about a topic that people really get a lot of peace of mind about, and that is FDIC insurance. And we're going to answer the question, is my money really safe at the bank?

00:12:09 Shanna Browning: And that's a really important conversation we don't want you to miss. For Daniel Hill I'm Shanna Browning.

00:12:15 Daniel Hill: Thanks for listening. Go out and make some sense of your cents.