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Inflation's Impact On Your Money

Do you ever wonder why the cost of our stuff always seems to go up? For example, when I was growing up a postage stamp (do people still know what these are?) was 25 cents. Now they cost 49 cents. A candy bar was 50 cents. I now sound exactly like my grandparents who used to exclaim that "a Coke used to cost a dime!"


The reason prices go up is something called inflation. That's not all that interesting. But how inflation impacts our money, that deserves some attention.



Inflation


Inflation is a term given to the situation where prices go up. That's it. Prices go up = inflation. Inflation applies to the prices all all goods and services, and there are as many ways to measure it as you can think of. The most common is the consumer price index, or CPI, but there is a producer price index, and an index of different industries and geographic areas. 


Let's make this easy. Inflation, no matter how it's measured, is when the price of our stuff goes up. 


Causes


When I was in college I learned really quickly that the answer to almost every question in economics is "supply and demand" (the other common answers are "trade offs" and "opportunity cost"). Thus, the reason for inflation is supply and demand. 


Prices of our stuff can go higher because the demand for stuff went up faster than that stuff could be supplied. The jargon for this is demand-pull.


Alternatively, prices of stuff could go up because cost of doing business went up. In other words, the cost of production or inputs went up; things like wages and energy. Producers need to charge more to cover their costs in this case. The jargony word here is supply-push. 


This is slightly advanced, but just know that there are reasons for inflation that are being measured and monitored. 


Nominal Vs. Real


This is a little technical, but I think it is important. When people (namely, economists) use the word "nominal" they mean the most common definition of the words they use. So, a nominal rate of return is the actual return you earned. If you had $1,000 and your nominal