Inflation is a complicated topic and misunderstood even by economists. We’ll do our best to explain it at a high level.
In summary, inflation occurs when there’s more money chasing fewer goods and every dollar becomes less valuable. This occurs for multiple reasons including government printing more money (e.g., Stimulus checks), consumer demand of goods outpacing supply of goods, employee wage increases, etc. Inflation isn’t necessarily bad. In fact, the government has intentionally attempted to achieve 1-2% inflation every year in the last decades.
How do they measure inflation?
One method is the Consumer Price Index. Think of this as the price you pay for the “basket” of your personal needs (transportation, food, medical care, etc.), tracked every month. So as the price of milk goes up, this “basket” price will be impacted.
What’s been causing the recent inflation?
In the last 2 years, inflation has been growing 6-7%. First reason is the stimulus checks. With more money in people’s hands, there is more demand for goods. Unfortunately production supply has not kept up. With more demand and fewer products, prices will go up (If you’ve shopped around for a car lately, you likely observed price increases due to the lack of supply).
2nd reason, production is still catching up to pre-pandemic levels. With labor shortages across the world, factories have not been able to catch up with the recent demand.
3rd reason, as the service industry (tourism, restaurants, etc.) shut down in the early pandemic and partially shut down today, consumer spending has shifted from travel and experiences to material goods. This adds further strain to supply chain and production.
But why should you care?
Inflation makes people nervous. You patients will likely be considering where to invest their money or whether to sell their stocks in anticipation of a market cash. They will also be hearing stock advice from friends and colleagues that will drive FOMO or panic. For example, while it is expected that interest rates will rise to combat inflation, many might feel the need to purchase a home immediately even at the risk of actually affording one. They will also likely perceive inflation through a political lens, blaming the new or old administration, further amplifying their anger.
Advice to consider during sessions.
In summary, inflation occurs when there’s more money chasing fewer goods and every dollar becomes less valuable. This occurs for multiple reasons including government printing more money (e.g., Stimulus checks), consumer demand of goods outpacing supply of goods, employee wage increases, etc. Inflation isn’t necessarily bad. In fact, the government has intentionally attempted to achieve 1-2% inflation every year in the last decades.
How do they measure inflation?
One method is the Consumer Price Index. Think of this as the price you pay for the “basket” of your personal needs (transportation, food, medical care, etc.), tracked every month. So as the price of milk goes up, this “basket” price will be impacted.
What’s been causing the recent inflation?
In the last 2 years, inflation has been growing 6-7%. First reason is the stimulus checks. With more money in people’s hands, there is more demand for goods. Unfortunately production supply has not kept up. With more demand and fewer products, prices will go up (If you’ve shopped around for a car lately, you likely observed price increases due to the lack of supply).
2nd reason, production is still catching up to pre-pandemic levels. With labor shortages across the world, factories have not been able to catch up with the recent demand.
3rd reason, as the service industry (tourism, restaurants, etc.) shut down in the early pandemic and partially shut down today, consumer spending has shifted from travel and experiences to material goods. This adds further strain to supply chain and production.
But why should you care?
Inflation makes people nervous. You patients will likely be considering where to invest their money or whether to sell their stocks in anticipation of a market cash. They will also be hearing stock advice from friends and colleagues that will drive FOMO or panic. For example, while it is expected that interest rates will rise to combat inflation, many might feel the need to purchase a home immediately even at the risk of actually affording one. They will also likely perceive inflation through a political lens, blaming the new or old administration, further amplifying their anger.
Advice to consider during sessions.
- As a therapist, you shouldn’t attempt to offer financial advice nor predictions. However as noted in prior recessions/depressions, the ones who tend to come out with less regret are the ones that do not panic. If they have a monthly investment transfer from their bank account to their investment fund, they should maintain it.
- Remind them to stop checking their 401K. It is expected that in a timespan of 30-50 years, an upward trending curve is not a straight line, but an up and down choppy line trending upwards.
- Remind them that a vast number of Americans are living paycheck to paycheck. They should feel grateful to have the luxury of an investment portfolio.
- Advise them to take economic metrics with a grain of salt. Inflation, unemployment rate, GDP growth are important signals of the wellbeing of our country, but do not capture the full picture. Have your patient focus on controllable, personal metrics such savings and career goals.