Unless you are old enough to remember the economics of the 1970's, inflation might seem like a nerdy term that really has no relevance to your life. This is why you need to understand how inflation affects your life and what adjustments you may need to make as a result.
Imagine that one day, your Boss comes to you and says “Hey, we need to lower your pay by 10%”. You would immediately and justifiably get upset. Losing 10% of your income could be devastating. But if on the other hand, the goods and services that you would buy with that same income suddenly cost 10% more, then it operates effectively the same as you losing 10% of your income.
It is important to understand what inflation is and what it is not. At any given time, any random product or service that you might want could go up in cost from a whole host of factors, such as the cost of labor, the cost of the raw materials, or even the cost of delivering the product to you.
What inflation refers to is an across-the-board increase in the cost of goods and services. When it happens, no matter what you buy, everything starts to cost you more money. Sometimes the item just goes up in cost, and other times manufacturers will try to hide the increased cost from you by keeping the price the same and simply giving you less of the product. This is called “shrinkflation”. A good example is paper goods, such as toilet paper, where a company releases smaller rolls and keeps the price the same so that when you are at the supermarket, you don't get sticker shock. Shrinkflation is particularly insidious because most people don't see it, but they suddenly can't figure out why they are having to make more Costco runs each month.
On a broad level, inflation destroys whole economies. Countries that were once prosperous can point to their rates of inflation as one of the factors that brought them to ruin. Germany in the 1930's and modern Venezuela are two prominent examples.
On a personal level inflation can cripple your personal and family budget. It might not seem like a big deal if milk, eggs, or gasoline goes up by a few cents here or there, but it really adds up. Because of this, it is extremely important to start maintaining a monthly budget so that you can see what your lifestyle costs you. You should record how much things cost you every month. In my practice one of the areas that people consistently misjudge their monthly costs are food/groceries, and gasoline expenses. Even if your belief about your monthly budget is off by as little as 10% it can really affect your ability to plan and stay ahead of your monthly expenses. It certainly affects your ability to service ongoing debt.
For example, many people are only able to make the monthly minimum payments on their credit cards. Often the source of this comes from a family's last 10% of available funds from their wages after paying their living expenses.
If the world suddenly costs you 5% to 10% more than before, then your ability to make those monthly minimum credit card payments is severely impaired.
Even people who are not in debt need to be concerned about inflation, and seeking out the help of a financial planner to hedge your losses through investments is a smart move. Either way, with few exceptions, everybody needs to be concerned about the signs of inflation, and if it suddenly feels like you don't seem to be making the ends meet, with no major changes in your life, inflation may be the culprit, and it could be the time to speak to a Bankruptcy attorney (if you are in debt) or a Financial Planner (if you are not in debt).
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