Inflation is Misconceived by Most

Inflation defined by Fidelity Investments is: a general increase in the prices of goods and services.

As prices increase, the buying power of your money is eroded. Fidelity further states inflation rates are measured by comparing the price of a list of goods and services from year-to-year. It’s also how most of us understand inflation. However, it’s completely wrong.

Inflation is not a standard number as determined by economical entities. The actual cost of inflation is different for each one of us. For some, it will be higher. For others, it will be lower. It may actually be deflation for a lot of people. How can this be?

Simply put, true inflation needs to be calculated by the amount of work hours required for a person to afford the product/service they want to buy.

Let’s compare the two. If a loaf of bread costs $4 and rises in price to $5 two years later, the economical measure of inflation is 20% over that time frame. However, that assumes the buyer is earning the same wage as two years ago. For most working people, that’s unlikely the case. Most people start their work careers in lower paying jobs and gradually reach their peak income around the age of 50.

For a true measure of inflation, one needs to consider income. If one is earning $16 per hour at the same time bread costs $4, it requires fifteen minutes of labor to pay for the loaf of bread. However, if that same worker is earning $23 per hour after bread jumps to $5, it only requires 13 minutes of labor. (Naturally, payroll taxes would alter both results somewhat).

Let’s use a product with a higher cost, say… rent. $1,200 in rent would require 75 hours of labor at $16 per hour. If rent increases by 20% inflation over our same two year period, rent jumps to $1,440. If the worker is still earning the same wage, that person has suffered the announced 20% inflation. However, if that worker is earning $23 per hour after the rent jump, it only requires 62 hours of labor to pay the rent, even though the dollar amount is higher.

In both examples, the buyer actually benefited from... deflation. While the dollar amount may have risen 20%, the amount of work required for purchase shrunk by 17%.

Getting ahead of the inflation game simply requires commitment and incentive, rather than being satisfied with one’s status quo. It’s true now, and always has been. If flipping burgers for 50 years is your goal, you’re going to lose the game… badly. One should always aim to increase their life skills. The employer needs to see a worker as being more valuable than others. It’s true even for self-employed people seeking customers. Simply put, work stagnation is financial stagnation.

‘Announced’ inflation may devalue the dollar, but one can overcome it. Increase your skills, invest for the future, limit non-necessities, and never be satisfied with your status-quo. Inflation shouldn't be accepted as a standard number, but a personal ‘work hours required to buy’ equation.

Source: Taylor Morralda

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