INFLATIONWinners and LosersWe are hearing lot about the word ‘Inflation’ these days. It is a ‘word’ Economists use that is not understood by the average consumer? Is it going to affect me? Should I be concerned? How can I mitigate its affects? Is it real?

Yes, inflation is real and is felt by all.Inflation is defined as an increase in prices as the value of money decreases. This past July we saw an inflation rate of 5.4% in the Consumer Price Index (CPI) compared to a year earlier, the sharpest increase since 2008, according to the Bureau of Labor Statistics (BLS). Our dollar does not go as far as it did last year due to inflation. This is a decrease of 5.4% of the purchasing power of our money.

The Federal Reserve is the central banking system of the United States. It pegs the CPI core inflation at 2%. Core inflation does not include food or energy. This seems unrealistic to the consumer because they see prices at the supermarket, at the gas station, and home heating costs rising faster than core inflation. We see it generally in all aspects of the things we buy.

The Federal Reserve relies on a broader statistic, the Personal Consumption Expenditures Index which is reported by the Bureau of Economic Analysis (BEA). The PCE excludes food and energy also and was 4.0% in June 2021. This index is much less volatile than the CPI because it uses data from households nationally as well as businesses.

Some industry sectors increase so much that it may deter spending. For example, prices in the real estate market have seen a serious increase in home prices. Sometimes much more than the asking price creating bidding wars.
This is a perfect example of supply and demand in action. We can see it in some communities. As the demand (buyers) for housing increases, the supply (inventory of houses) decreases, thus increasing prices (asking price). It can get so high that some are left out of the real estate market.

Another example is in energy, which increases the price of petroleum which goes into most products, retail, and food industries. Direct cost increases such as: raw materials, utilities to manufacture the goods, transportation cost, etc. when added to the indirect costs to operate a business raise the prices of these goods and services. As the costs increase, the business owners pass these costs to the ultimate consumer in the form of higher prices, contributing to inflation.

The result is inflation = a hidden tax to the ultimate consumer.There are always winners and losers. Who are they? Generally, the winners are those who have assets and see the prices of those assets increase with inflation then pass the increased prices on to consumers. Those using those assets may pay more or pay higher interest, for their use of these products or services, are the losers. As buyers, we can buy at higher prices, buy less, or defer buying altogether. Don’t like the idea of paying higher prices, buying less, or deferring buying decisions?

Well, let’s look at substitutes.Need to travel by car to get to work, shopping and take the kids to school? We would like a Mercedes, but can a Chevy get us where we want to go? Most definitely. The Chevy is a substitute for the Mercedes.
Would you like to eat steak? The cost to raise grain fed beef has increased greatly. Beef is a protein. There are other substitutes for proteins. Protein substitutes for beef could be chicken, fish, pork, beans, eggs, or cheese.</p

Can you think of other substitutes?Substitutions are our best way to offset the impact of inflation. By thinking about ways we can substitute less expensive items and services for those that are most inflated, we can maintain our lifestyle, lower our costs and retain our savings.

Looking for ways to hedge against inflation? Give me a call at (973)857-7650! We can review your expenses, both business and personal to identify ways to ensure that inflation doesn’t take too much of a bite out of YOUR home and/or business budgets.

These are the expressed opinions of Frugal Brenda LLC and are by no means the only options for the reader. It is suggested that they seek professional help for their individual issues.