Three more questions about inflation

In response to my previous post to reporter and fellow Grinnellian, Courtney Sherwood, asks three more questions. Let’s take them one at a time.

* How is inflation being experienced now? (In this community, across the U.S., around the globe.)

Inflation is being seen mostly through increases in food prices energy. Food prices for basic staples have increased about 50-100% and energy prices about 20% for gas.
In the US and Europe households spend less than 10% of their budget on food. So what happens when food prices go up. Not a lot, people reduce spending in other ways, save less, or shop at Walmart instead of Whole Foods (as this article in the economist suggests).


Around the globe, in the typical developing country food spending can be anywhere from 50-80% of the household budget. Protest over rising bread prices are occurring in Egypt and India. In Egypt as highlighted in this economist article, lines are getting out of control and causing violence. The problem is well summed up by a Egyptian who was interviewed by the story.
“I don't want a car, I don't want cinemas, I don't want to eat Kentucky chicken,” declared Masoud Hafez, an electrician who has worked in the factory for 28 years, brandishing a monthly pay-slip of 249 Egyptian pounds ($46). “I want bread for my children.”


* What is causing it?
Focusing on the high food prices. Increased demand for food from growing Asian economies. The increase demand for grain for biofuels due to high oil prices. Droughts also seem to be impacting the ability of farmers to produce. (another economist article)


* What should we do in the face of rising inflation, as individual consumers?
Not a lot individual consumers can do. As basic economic theory shows usually individuals can’t impact prices. Filling the pantry with some pre-package foods might help or even starting your own garden. You might need to shift your food budget around.

For long term savings I-bonds might be a more attractive investment, although the stock market should figure inflation into prices.

Finally, I would like to note I found all the articles for this post in the Economist Magazine, if you want to keep up to date on how inflation may impact you, that is probably the best source.

USA Steady Prices Since 1981!

Beloit College where I used to teach annually puts out a mindset list of things people entering college that year have not experienced. If they didn’t do it a few years ago may I suggest students entering college now have never experienced an inflation rate of more than 5.5%. The last time inflation for the year was above 10% the year was 1981 and this economist couldn’t even say the word inflation. This Washington Post article highlights some kids learning about inflation as food prices go up. A friend from Grinnell, Courtney Sherwood, asks some good questions to consider in the face of inflation on her blog:

“Is there any value in saving money, when its purchase power declines with each passing day? What should I spend on now, with the knowledge that it will cost more tomorrow? What is the best way to plan for my future when I don't know what the future holds? I've never been through this before.”

So here is a simple inflation primer.
What is inflation? It is a measure of the increase in prices between years

How does the government measure inflation? Basically they have a set of typical goods called a basket and they see how much the price of that basket changes.
Sometimes reports talk about inflation without food or energy prices in the basket (core inflation), why not include food and gas in inflation? These prices are volatile to weather and political shocks, so they might not reflect well the overall changes in prices.

Why is inflation bad? Some inflation is not necessarily bad, the problem is when it gets too high people realizes prices will soon be going up again so they should buy things sooner, causing more short term inflation. If it gets too out of hand people will have to continually run to the store as soon as pay day hits, causing long lines and a real problems.

So what to do? As Simpsons news anchor Kent Brockman might ask "Professor, without knowing precisely what the danger is, would you say it's time for our viewers to crack each other's heads open and feast on the goo inside?"

No I don’t think it is time to panic. I have heard a few grumblings of worries about inflation from economists, but there seems to be little worry about prices increases in the US, although there may be greater problems internationally. To hedge yourself against inflation you can always buy stuff sooner, but if you want to be part of the solution and not part of the problem consider investing in Ibonds. These are bonds offered by the US government that pay a fixed interest rate plus inflation. If inflation goes up you get a greater return. I own some Ibonds, they probably didn’t do as well as some of my other short term cash investments, but they are now beating my money market account.