What is inflation and why should we care?

On average, the prices we pay in stores and online increase year after year. Inflation is the term economists use when the prices of all consumer categories from which we buy increase month after month. 

So why should we all care about inflation?

Older residents in the Camden News area can likely remember back to the 1974-1975 and 1979-1981 periods of high inflation. The monthly average of inflation during those 60 months was 11 percent. Employees were getting good raises in their paychecks, but it didn’t help when they got to the store. Everything that they bought for $1 the week before was now costing $1.25. And when the wages got too high, companies started shutting down the manufacturing, and people were out of work and the prices were still high.

  • Picture a balloon being blown up by a child. They blow as hard as they can, and little by little, the balloon gets bigger. Soon the balloon can’t get any bigger and an adult is there to tie it shut. That is how our economy is designed to operate. Slow inflation with adult supervision.
  • Picture again a balloon, but a helium tank is being used instead. With a knowledgeable operator, the balloon would be blown up and tied off quickly and a happy child sent on their way. But if the operator is not properly trained, the balloon fills so quickly that it pops. And a child cries. It takes the operator a while to learn when to stop the helium, and many balloons have popped, and some of the children in line have walked away in tears.

We should care about inflation because for those on a fixed income like Social Security –our parents and grandparents – they don’t get a pay raise every time prices go up in the store. And they can’t look for another job that pays more. Inflation hurts the most vulnerable in our neighborhoods, who keep getting the same amount of income no matter how much the prices go up for the things we need. [Note: Social Security payments do increase annually with a cost-of-living adjustment, but it is not sufficient when prices are rising throughout the year.]

This sounds discouraging, but the good news is that the Federal Reserve System (The Fed) is working to keep our economy on an even rate of inflation – about 2 percent per year. There are institutions (government and non-government) that track the prices of regular goods and services on a monthly basis, year after year. There are nine Federal Reserve Banks (one in Minneapolis) that control the flow of money available to banks for lending. The Fed uses the data to slow down the economy by raising interest rates when necessary.

Inflation translates to higher interest rates. To be a knowledgeable operator of your finances:

  • Check your credit cards (or store accounts) for interest rates.  It isn’t a bargain if you pay 20 percent interest on a credit card for two years. 
  • If you are paying on a mortgage, most interest rates are locked in (with the exception of adjustable-rate mortgages). Be cautious of refinancing offers at this time even if they try to sell you on the amount of equity you can be paid. (That’s just you giving yourself a loan that you will pay on for a longer time, possibly at a higher interest rate.)

To learn more about inflation, a great resource with short videos can be viewed at  Inflation 101: Center for Inflation Research (clevelandfed.org).  Go to clevelandfed.org, then click on Our Research > Center for Inflation Research > Inflation 101.