Put simply, inflation is a general increase in prices that reduces the purchasing power of money.
I used to order from the local pizza shop named Derby’s. That small pizza with one topping was $4.25. An inflation calculator using the U.S. Inflation Index will give me the price of that pizza in today’s dollars:
- $4.25 in 1990 is equal to $8.34 in 2019
The truth is, I am still an avid consumer of pizza. In fact, I get a small Neapolitan pizza with one topping each week after my yoga class.
- Pizza Fire (one small pizza with one topping) = $9.49
If I had stashed $1,000 in cash in 1990 and I used the money to buy pizza in 2019, I’d get less than half the pizza. So again, inflation is the cost of a good rising over time.
How to Measure Inflation
The United States measures inflation via the consumer price index (CPI) basket of goods. The CPI calculates inflation (or deflation) every month. There are over 200 CPI categories; let’s take a look at few:
- Food & Beverages
- Medical Care
- Education & Communication
- Others – smoking, haircuts, etc.
Why Is the CPI So Important?
CPI is important because it’s a shorthand for the state of the economy. For example, the lower the inflation rate, the less money you need to pay for essentials. The opposite is true for rising inflation rates. CPI is also important for the following:
- Collective bargaining agreements use the CPI to determine the pay increases for their covered workers.
- Social Security payments adjust to match the COLA (Cost of Living Adjustments) based on CPI.
- Costs of federal lunch programs in schools across the country are tied to CPI.
- Many other things, like rent costs, royalties, alimony, etc., are based on CPI.
Invest to Prepare for Inflation
Inflation essentially eats away at your money, which is exactly why you must invest in assets that grow faster than inflation. So, start investing today with our robo-investor tools. It’s as simple as 1, 2, 3.