Inflation–a term that dominates headlines and dinner table discussions. But few truly understand what it means or how it works. I encounter countless misconceptions, ranging from political myths to flawed assumptions.
Let’s untangle these myths and shed light on the truth about inflation.
Myth #1 Inflation Equals Rising Prices
While inflation often manifests as rising prices, they are not synonymous. Inflation refers to the rate at which prices for goods and services rise over time. Prices go up, and your purchasing power goes down. But again, it’s not just about prices going up—it’s about the pace and consistency of that rise across the economy.
For instance, individual items like gasoline or housing may spike in price due to specific supply or demand issues. These fluctuations don’t always equate to inflation. Inflation reflects broader trends, measured systematically over time.
This helps explain the disconnect between recent optimistic inflation data versus what you’re seeing and feeling at the cash register. This disconnect is also the basis for countless debates in break rooms and across social media. Inflation is down and under control. And prices for goods and services are higher compared to a few years ago. Both are true. That’s because higher prices and inflation are not the same thing.
Myth #2 The President Controls Inflation
One of the most persistent myths is that inflation is entirely political, with the president sitting next to the inflation on-and-off switch. In reality, inflation is driven by complex factors, including supply and demand dynamics, global commodity prices, and monetary policy managed by the Federal Reserve.
Yes, government policies can influence inflation, but attributing the rise or fall of prices solely to a political leader oversimplifies the problem. For example, disruptions in global supply chains–say from a worldwide pandemic–or significant changes in oil prices often have more immediate impacts on inflation than any single policy decision.
In America, we’re very good at making things political. And yes, the president impacts many things, including the economy. But the economy and inflation are far more complicated than we want to admit.
Myth #3 We Need Deflation to “Fix” Inflation
I get it. Calls for a return to lower prices often stem from frustration with how expensive things have become. It makes sense to want a path to cheaper groceries. But deflation—where prices consistently drop—is dangerous for the economy. It discourages spending and investment, as consumers and businesses delay purchases anticipating lower prices, leading to slow growth and job losses.
Want to know the two times we saw significantly measurable deflation in America? The first was the Great Depression, between 1928-1933. The second was the Great Recession, between 2007-2009. There was nothing great about either of those periods. And there is nothing great about deflation.
Instead of deflation, economies strive for price stability: a moderate, predictable inflation rate that maintains economic momentum while preserving purchasing power. We should also be rooting for real wage growth, not lower prices.
What Can You Do About Inflation?
Here are a few tips to reduce the impact of inflation on your finances:
Review your spending: Increase your wallet awareness and account for rising costs in essentials like groceries, transportation, and housing.
Keep Investing: Hedge against inflation by investing in stocks, real estate, or Treasury Inflation-Protected Securities (TIPS).
Stay Informed: Learn to distinguish between short-term price changes and broader inflation trends. This will help you be less reactive with your money.
Understanding inflation is vital for navigating today’s economic challenges. Moving beyond misconceptions and myths, you’ll be on a better path to financial freedom. Remember, inflation simply signals how the economy moves and evolves over time. Understanding how it works is the first step in making better financial decisions.