We hear the word inflation all the time. So, what is it, what’s causing it, and how do we deal with it?
News 3’s financial resource, Carl Carlson CEO & Founder of Carlson Financial helped answer that question.
His example was, when you go to the gas pump, the grocery store, or just to pick up a few things at Walmart and you get sticker shock, that’s inflation. He said his wife bought a whole chicken the other day, and for what usually costs $8.00 was $16.00. That’s inflation. Carlson said definition of inflation is the general increase in prices and fall in the purchasing value of money. Whereas before we could buy one chicken, now our same amount of money will only buy ½ of a chicken.
Three things are causing this inflation. Carlson said those are, increase in money supply or M1, supply chain disruption, and demand.
The government has been printing more money and adding it to the supply of money that is already in the country. Usually, if the government is printing new money, at the same time they are taking old worn out money out of circulation. But for 2020 and 2021, that has not been the case. The government has been printing new money and just spending it, or using it to purchase bonds from ourselves. There is a thing called price equilibrium which means when money supply increases, prices have to rise. It doesn’t always happen immediately though. Since 2020 the government has more than doubled the money supply, Carlson said.
When it comes to the second reason, supply chain disruption Carlson said a lot of that is based on COVID-19 pandemic issues and the shortage of labor.
He said, when huge cargo ships are just sitting out in the ocean because there is no one to dock them or unload them then we aren’t getting our normal supply of things but the demand for them hasn’t changed so the price will go up. The Fed is calling this transitory inflation, meaning it isn’t permanent. It’s will transition back to the same old prices once the labor is back.
What can we do about inflation? Carlson said most importantly, be informed and get educated. The more you know, the more you can adapt your personal situation to deal with what is happening with inflation. But, Carlson said first is to push back on the government increasing the supply of money into the economy. Change what you purchase (chicken vs beef), Change how you spend (work from home vs spending gas to commute), make more money (ask for a bigger raise or change jobs) and he said to make sure your retirement nest egg is growing to outpace inflation.