Inflation is one of those words that gets thrown around a lot, especially when prices start rising and people feel like their money isn’t stretching as far as it used to.
But what exactly is inflation? Why does it happen? And most importantly, how does it affect your finances? Let’s break it all down in a simple, no-nonsense way.
What Is Inflation?
At its core, inflation is the rate at which the general level of prices for goods and services rises over time, reducing the purchasing power of money.
In other words, when inflation goes up, every dollar you have buys less than it did before.
Understanding Inflation: Why Your Money Doesn’t Go as Far as It Used To
Inflation is something that impacts all of us, but it’s not always easy to grasp. Another way to think of it is this way: Imagine you have $1,000 in the bank at the start of the year.
Over the course of the year, you take out $100 for personal expenses. Last year, that $100 could have bought you your favorite pair of shoes for $50. But this year? Those same shoes now cost $60.
Here’s where inflation comes in: The $100 you withdrew is now worth less. It still says $100 on paper, but due to inflation, you’re spending $10 more than you would have last year for the same shoes.
Examples: The Shrinking Candy Bar
Imagine you used to buy your favorite candy bar for $1. Over time, you notice that the price has gone up to $1.25. You’re still getting the same candy bar, but you’re paying more for it, that’s inflation. In some cases, companies might even keep the price the same but make the candy bar smaller. Either way, you’re getting less for your money.
Let’s say you typically budget $300 a month for groceries. Last year, you could fill your cart with everything you needed for that amount. This year, you’re now spending $320 for the same items. Even though you still have $300, inflation means you’re getting less for your money.
The Gas Tank: More Money, Less Gas
Think about filling up your gas tank. Last year, you could have filled it for $30. This year, it’s $35. The price per gallon increased because of inflation. Again, your $30 didn’t change, but what it can buy has decreased.
Now, another way to explain this is imagine you take out $100 for gas, just like you always do. Even though your $100 bill still says $100, it’s now worth less.
Instead of filling up with $3 gas, you’re now paying $3.50 per gallon. That $100 doesn’t stretch as far as it used to and buys less gas, even though the face value of the bill hasn’t changed.
Inflation might seem like a small problem, but it can add up quickly. The purchasing power of your money shrinks over time, so the same amount of money doesn’t go as far.
Understanding inflation and its effects can help you plan better and make smarter financial decisions.
What Causes Inflation?
Several factors contribute to inflation, but here are the three biggest ones:
- Demand-Pull Inflation – This happens when demand for goods and services exceeds supply, causing prices to rise. Think of it like concert tickets, if everyone suddenly wants to see a big artist perform, ticket prices skyrocket.
- Example: A surge in consumer spending after stimulus checks were distributed led to increased demand for products, which in turn raised prices.
- Cost-Push Inflation – When production costs increase (like wages or raw materials), businesses pass those costs onto consumers by raising prices.
- Example: If the cost of oil rises, transportation and production costs go up, making everything from groceries to electronics more expensive.
- Built-In Inflation – This occurs when workers demand higher wages to keep up with rising costs, and businesses respond by increasing prices, creating a cycle.
- Example: A company raises wages due to higher living costs, then increases the prices of its products to compensate, leading to further inflation.
Real-World Examples of Inflation
Throughout history, inflation has played a significant role in economies worldwide. Let’s examine some of the most well-known cases and imagine what it was like to live through them.
- The Great Inflation (1965-1982, USA)
- What happened: In the 1960s and 70s, government spending increased significantly, particularly due to the Vietnam War and social programs. At the same time, oil prices skyrocketed due to an oil embargo by OPEC. The Federal Reserve kept interest rates low for too long, which further fueled inflation. By 1980, inflation had reached nearly 14.8%, making everyday essentials much more expensive.
- Imagine living through it: You’re a kid in the 1970s, and every Saturday, your dad gives you $1 to buy a burger and a soda. One year, that $1 covers everything just fine. A few years later, you go to the same diner, and suddenly, the burger alone costs $1.50! Your dad now has to give you more money, or you have to settle for just the soda. People all over the country are struggling because their wages aren’t increasing as fast as prices are rising.
- Weimar Republic Hyperinflation (1921-1923, Germany)
- What happened: After World War I, Germany was burdened with massive war reparations. To pay them off, the government started printing more money, leading to rapid devaluation of the German mark. Prices doubled almost daily, and by the end of 1923, the exchange rate reached 4.2 trillion marks to one U.S. dollar.
- Imagine living through it: One morning, your mom gives you a few marks to buy bread. You rush to the bakery, but by the time you get there, the price has doubled. Your family has to carry wheelbarrows full of money just to buy groceries. Some people even start using stacks of cash as wallpaper because it’s cheaper than buying actual wallpaper. The value of money is disappearing right before your eyes.
- The 1970s Oil Crisis
- What happened: In the early 1970s, oil-producing countries in OPEC placed an embargo on exports to the U.S. in retaliation for U.S. support of Israel in the Yom Kippur War. This caused oil prices to quadruple, leading to higher transportation and production costs, which in turn drove inflation to double-digit levels.
- Imagine living through it: You’re sitting in the backseat of your family’s station wagon, and your parents are frustrated because they’ve been waiting in line at the gas station for hours. When it’s finally their turn, they can only buy a limited amount of gas. Everything seems to cost more, and your parents have to cut back on family outings because gas prices have doubled.
- Venezuela’s Hyperinflation (2010s-Present)
- What happened: Due to economic mismanagement, declining oil revenues, and excessive money printing, Venezuela experienced one of the worst cases of hyperinflation in modern history. At its peak in 2018, inflation reached over 1,000,000%, rendering the Venezuelan bolívar practically worthless. Many people turned to bartering or using foreign currencies instead.
- Imagine living through it: You go to the store with a handful of bolívars to buy milk, but the cashier tells you the price has doubled since yesterday. You leave empty-handed. A few months later, stores stop using price tags because costs change every few hours. Instead of cash, your family starts trading bags of rice or bottles of oil to get what you need.
- COVID-19 Pandemic and Inflation (2020s, Global)
- What happened: The COVID-19 pandemic disrupted global supply chains, causing shortages in many products. Meanwhile, governments injected massive amounts of stimulus money into economies, increasing demand. With limited supply and increased demand, prices surged, leading to the highest inflation rates seen in decades.
- Imagine living through it: You’ve been saving up for a new gaming console that usually costs $300. When you finally have enough money, you check online and see that the price is now $500. Stores are out of stock, and scalpers are selling consoles for double the price. Your parents tell you that groceries cost way more than they did last year, and even rent is going up. Everything feels more expensive, and no one knows when it will get better.
How Inflation Affects Your Money
Inflation impacts nearly every aspect of your financial life. Here’s how:
1. Eroding Purchasing Power
- Your money doesn’t go as far as it used to. A $50 grocery bill from 10 years ago might barely cover a small basket today.
2. Higher Interest Rates
- The Federal Reserve often raises interest rates to curb inflation, making it more expensive to borrow money (think mortgages, car loans, and credit cards).
3. Savings and Investments
- If your savings account earns 1% interest but inflation is at 3%, you’re actually losing money in real terms.
- On the flip side, certain assets like stocks and real estate tend to perform well during inflationary periods.
Conclusion
Inflation isn’t just some economic buzzword, it directly affects your wallet, your savings, and your overall financial well-being. Understanding why it happens and how to safeguard yourself can make a huge difference in maintaining financial stability. The key is staying proactive, making informed choices, and ensuring that your money continues to work for you, no matter how the economy shifts.
The Broke College Student 
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