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Who’s Afraid of the Big Bad Wolf: Demystifying Inflation Part 2

Who’s Afraid of the Big Bad Wolf: Demystifying Inflation Part 2

| July 14, 2021
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Inflation: Why It’s Bad 


Inflation has a lot of effects positive and negative. Today, let’s focus on the latter! 

Don’t worry; I am not doing that just to ruin your day. We’re going to discuss the negative side effects of inflation now so that we can discuss the positive ones later. Then we’ll jump into why the combination of these good and bad characteristics means that inflation is something you probably shouldn’t worry too much about. Today, though, we’re gonna act like your local news network and talk about the bad stuff only. You’re welcome! 


Inflation is known as the increase in prices of goods and services, causing the value of the dollar to decline. We talked about this last week, and I hope you didn’t forget. If you did, that is basically your way of calling me boring, and that’s not a nice way to speak to someone who manages your money. 


So, now that we’ve defined inflation and established that I am the most exciting financial advisor you’ve ever had let’s talk about what makes inflation scary. 


Loss of Purchasing Power 


The first effect is a little obvious and the most immediate. We can’t buy as much stuff. Your money is worth less than before, so it buys less than before. Your one dollar cup of coffee becomes two dollars. The days of buying your coworker a latte on your way to work are well behind you. Now, you gulp down your Starbucks in the parking lot so that nobody knows you didn’t want to spend the extra cash on a cup for them. Oh well. Tell them that you’ve gone on an enlightenment journey where you give up caffeine for tea, a much healthier alternative. You also drink eight cups of water a day, read instead of watching television, and pigs are flying in your backyard. 


Or you could tell them that inflation means you’re not keen on spending any extra dollars on something you don’t need. Most likely, they will understand. That’s because inflation affects everyone and won’t be reserved for your Starbucks order. Inflation will adjust the prices of most general goods and services, so almost everything becomes a little bit more expensive. That’s right—almost everything. You thought you could get away with the coffee thing, huh? We all know you're not bringing your coworkers coffee in the morning. Nice try, fake “good guy.”


Reduced Real Income

If inflation grows to a high enough level, it may begin to surpass nominal wages. That means that the value of people’s real income is reduced. This, of course, spells out a lot of trouble. It is already difficult to afford that cup of coffee now that its price has risen, but when that is combined with the knowledge that your income as a whole is reduced, you might actually begin drinking tea and water instead. Nobody wants to live in that world. 




Stunted Economic Growth 

With high inflation comes a lot of confusion (less of it now that your lovely financial advisor has helped explain it to you, but that’s beside the point). It comes with confusion about what to buy, how much to spend, and whether or not to invest. This uncertainty usually means that people try their best to stop investing altogether. 


Companies might find themselves unwilling to invest, invent, or produce new things because there is no way of knowing how much prices and profits will fluctuate. Depending on how long the period of high inflation lasts, this could cause a halt in economic growth. Until the economy goes through another growth spurt, it will have to suffer the consequences of being the lame little runt on the field. Everyone says they stick up for the underdog, but we all remember middle school. Raise your hand if you stuck up for the short kid during recess. Hm, that’s what I thought.


Reduced Value of Savings  

Remember all that money you set aside, like a mature, responsible adult? Well, I have good news! You can take a break and start to act like a kid again because those earnings might begin to look a little bit like Monopoly money now. 


Okay, that’s not true. Only in the absolute worst-case scenario will your savings money start to resemble the ones in Monopoly. But, it will likely reduce in value, which will probably make you angry, cry, and kick out your family members. Huh, maybe it is like Monopoly. Moving on.


It’s already hard to set money aside, let alone keep money aside, so the fair share of funds that you did manage to keep in a savings account needs to be worth every penny. Unfortunately, when the penny is worth less than before, your savings will be too. This can set you back in regards to your savings goals and cause trouble for the people who live off their savings, such as retirees. So, if inflation goes up, take the time to call your grandma and tell her you love her. You can either give her some money or a phone call. Since inflation is up, I’d recommend the cheaper one. Sorry, Granny.


Lower Exports

When inflation rises in our country, we start to look a little less attractive to other ones. You remember that girlfriend/boyfriend in high school who seemed perfect until he lost his job and started asking you to front the bill? Yeah, like that. 


So, they kind of dump us. Since the price of our goods has risen, they’re less likely to keep buying them from us. They’ll move on to someone, and we’re stuck at home eating ice cream. Unless the price of ice cream has gone up too much, and then it’s back to tea and water. God, breakups suck, huh?


Bottom Line

Inflation sucks. Okay, see you again next week!

Just kidding, of course. I mean, inflation does suck. But that’s not the bottom line. In fact, the line between inflation being something bad and being something good is pretty blurry, and the economy likes to play jump rope with it pretty often. On a good day, we’re jumping on the side of inflation that actually does things like lowering borrowing costs, reducing unemployment, increasing growth, and strengthening currency. A lot of that seems like the exact opposite of what we discussed, and it is! It’s almost like you started to think the economy was rational. I see those pigs flying in your backyard as we speak. How cute.


But that seeming irrationality can be explained, which is precisely what we will be doing next week when we discuss why inflation can be good in some cases. So stay tuned because, unlike your local news network, we will actually be offering you something good to look forward to. See you then! 


Sources: https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp

https://www.economicshelp.org/blog/315/inflation/inflation-advantages-and-disadvantages/


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