What exactly is inflation?
Simply put, inflation is a decline in a monetary unit’s purchasing power over time, which makes prices climb. The value of a dollar doesn’t stretch quite as far as it used to. A certain amount of inflation is normal (2% annually, according to the U.S. Federal Reserve System), and can be a sign of a healthy economy. Remember when going to the movies cost $6.75? Now the average movie ticket is closer to $10. That’s inflation, but not the kind that has a grand effect on the day-to-day lives of most people, because the price increase is gradual, and wages typically rise somewhat as well over the course of so many years.
Inflation is high right now (6.8% at the end of 2021), which means you’re likely noticing a decrease in your dollar’s value at the grocery store and gas station. Over the past century, inflation has fluctuated from -2.8% in 1938 as the Great Depression was ending to 18.1% in 1946 after WWII. To see how past presidents handled inflation, give this article a read.
When it surges unchecked to the point that prices rise over 50% in one month, this is called hyperinflation. Hyperinflation has extremely detrimental effects on a country’s economy and the livelihood of its citizens, as in the example of Weimar Germany in the 1920s, when, in November 1923, a loaf of bread cost 200,000,000,000 marks. However, it’s important not to conflate all inflation with hyperinflation. While this term is being tossed around some internet spheres, hyperinflation is extremely rare and experts generally agree it’s unlikely we will come close.
Why is it happening now?
We’re experiencing these higher prices due to a few converging factors that relate to the Covid pandemic. This New York Times article breaks the complicated issue down clearly. Much of the price increase we’re seeing now is a result of the pandemic year’s supply chain issues and a physical shortage of goods to sell. As these kinks in the supply chain work out and the delivery of goods has adjusted to a world altered by the pandemic, it’s likely these price hikes will ease up. Then there’s the virus relief stimulus spending, which has pumped trillions of dollars into the economy to keep businesses and individuals afloat. Add in the “Great Resignation,” in which millions quit their jobs or retired early, leaving a big difference in the number of open jobs and applicants with which to fill them, and we’ve stumbled upon a trifecta to drive prices up.
What does it mean for me?
This blog from Lili explains the money illusion – the tendency for people to think in terms of nominal dollars and not the actual purchasing power of those dollars, which can spell bad news for freelancers who set their own rates, but fail to reassess in times of inflation. When reassessing your prices, consider your biggest expense, which depending on your line of work could be gasoline, lumber, or many other things. If the cost of this expense is rising, your rates likely need to rise, too. Otherwise, you’re setting yourself up to lose money, and potentially have to overcorrect in the future by implementing a sharp rate increase, which could result in losing clients. Inflation affects every freelancer differently, and each individual’s approach to riding the waves will be different, too.
How can I best prepare?
Inflation hits hourly workers and people on fixed incomes the hardest.
This is a good time to do an audit of your monthly expenditures and make sure you aren’t wasting money on things you don’t need. The, add up all of the expense items in your budget. Say that number is $5,000 for a month. Create an inflation category in your budget with 2% of that amount. So 2% of $5,000 is $100. When you get to the end of the year, that $100 saved a moth will help offset you higher than expected expenses for the year.
You should then bolster your savings. Inflation can eat away at the value of savings because a dollar doesn’t stretch as far. Consider setting aside even more money in times of inflation.
Here is gives some fairly universal advice to guarding against inflation: 1. Stay calm. 2. Secure your debt. 3. Spend less. Inflation impacts everyone differently, so it’s important to have a plan that is tailored to your life, your assets, and your income. 4. Put an inflation amount in your budget.