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A Breakdown of Inflation's Impact On Us

February 19, 2022

Inflation is real. We all feel it. However, the impact inflation has on your life might be a little bit different than you may think. 

Every day there is mention of inflation. And there are takes all over the place, why is it good, why is it bad, why it doesn’t matter, why it does, etc. 

Inflation is a great headline creator and definitely generates some clicks, but what is the truth behind what it actually means for us? 

First, let me start by saying that inflation was fully expected in 2021 and coming into 2022. The world shut down in 2020. People weren’t spending as much money, there were major supply chain disruptions, and there was limited supply of goods to buy. So of course coming into the following years people were going to spend more money and in turn drive up inflation.

Now that we have inflation, what does that mean for us in our everyday lives?

In short, it means some things cost more. A common idea is that inflation means everything costs are increasing at the same rate, which isn’t true. Many times we will see inflation in a couple different areas that is higher so that drives up the inflation number, but other areas will not have that same increase. The chart below shows us that.

To sum the chart above up into one number, the main tool we use to see what inflation is for us is the Consumer Price Index (CPI). We see the chart below from BLS of what that consists of. 

Now, even though it is understood that we use CPI for inflation, this pie chart shows us how inflation does not impact us in every facet of our life and it may not be as bad to us personally as the 7.5% current CPI number reads.

Let me explain.

For example, housing makes up 42.4% of the CPI. A year in which housing prices were up 16.9% alone will drive up the CPI given it is nearly half of the index. However, if you weren’t looking to move or do any remodeling then this increase didn’t impact you as much.

Next, the second largest component of transportation. Transportation includes new and used vehicles, fuel, parts and equipment, and public transportation. Well, the average used car price was up 35% during 2021 as it was difficult to get new cars out into the market because of supply chain issues. Public transportation like airlines was also up because of the incredibly slow year 2020 was for those companies. Parts and equipment are experiencing the same supply chain issues that cars have in general. We have seen fuel costs be significantly higher, but unless you needed to buy a new or used car or fix yours currently, you avoided many of those costs. 

The third largest component is food and beverage. This is one where we are impacted no matter what and it isn’t a great situation to have our costs here increase dramatically. My hope is that the cost increase we have seen there is driven by supply chain issues and rising fuel and energy costs. I’m hoping the supply chain issues will work themselves out. But, rising fuel and energy costs are a major driver of inflation in all of our lives. 

With the price of gas being up 50%, ultimately, fuel and energy costs tend to drive a lot of the inflation we see. When those costs are elevated, it costs more to operate a business from a manufacturing and shipping cost. However, when those costs come down we see inflation come down as well. 

We can see by just breaking down a few of the components that we are not impacted by all of them all of the time. There are of course some people that are impacted more than others, but that is dependent upon where you are in your life and what is currently happening in your life. 

There’s also a potential that in retirement you are impacted less by inflation than you think. In retirement you can pick and choose when you travel to avoid fuel costs, you probably aren’t moving or if you are you are downsizing to something less expensive to what you moved out of, and social security adjusts your income due to inflation. 

Inflation impacts everyone differently. We definitely don’t want 7.5% CPI consistently and issues may arise if it is a year over year trend of having high single digits inflation. However, time will tell where these numbers end up.

If there had to be a “playbook” on how to fight inflation it would actually be very simple. There’d be a few steps:

1. Invest or stay invested in the stock market. This is for two reasons. Inflation occurs in times of economic growth which is good for business. Additionally, stocks are the greatest hedge to inflation as companies tend to do better in times of economic growth.

2. Understand that inflation is very hard to predict and volatile. We always see those who are predicting inflation or are at least trying to. Actually predicting inflation percentage and being accurate are incredibly difficult tasks and honestly takes a lot of luck to go along with the knowledge. Inflation is something that happens from time to time and is something that will come back down. 

3.Repeat step 1. But also, the big point for our third step is to continue to live your life. Inflation will be there, and people will talk about it. As long as you live your life and have the peace of mind that you have a financial strategy in the background that is taking advantage of inflation then you’ll be better off for it.