Money Rehab with Nicole Lapin - Inflation is over 7%. Is that as bad as it sounds?

Episode Date: March 10, 2022

You’ve probably seen the headlines that inflation is over 7% for the first time in decades. Is that… terrible? Today, Nicole shares what this actually means for you, your bottom line, and how to deal. See omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Today is going to be one of those days where we break down the headlines.

And here is one that has spread like crazy. Inflation hits 7.5% for the first time in decades. Today's Money Rehabber saw that headline. Here she is. Hey, Nicole. My name is Rachel. And even though I'm studying econ, I am confused about the latest headlines around inflation. Over 7% inflation sounds insane. Has it ever been this bad? What sort of things will be affected because of it? I think I'm confused about it because I'm not entirely sure what inflation is exactly. Like, is inflation a noun or a verb or an adjective? I just honestly couldn't tell you. Thanks for your help. Rachel, here's another great finance secret on Wall Street. People

will tell you that inflation is confusing, but it's really not. You know inflation better than you think because you've experienced it. Inflation is the name given to the condition when costs are higher for everything. And I mean everything. I've given this explanation before, but inflation explains why movie tickets were five bucks in the good old days. And now they're 15, not even including the popcorn. By now, you know, I like to talk about lattes a lot. I'm probably one of the only financial experts that really advocates that you should keep that morning latte in your budget. But I'm going to stop there before I get myself into the small financial indulgence rant and just say, you're probably not surprised to

hear me bring lattes up here. But here I go. Tracking inflation is similar to making a cup of coffee. I know, I must be the most caffeinated podcast host out there, but stick with me. The ground coffee in the filter is the U.S. dollar. Inflation is the amount of water that runs through your filter. And your bank account is like the cup of coffee. If there's less water, your coffee is going to be stronger. If there's more water, you're going to need more coffee grounds in order to achieve the same strong cup of joe. If you don't get more coffee grounds to counteract the increased amount of water, that's when you get watered-down coffee.

Inflation wouldn't be such a problem if everyone got pay increases to keep up with the pace of inflation. But unfortunately, that's not a requirement. I certainly, certainly don't like weak coffee. Life is too short for that shit. But what I like even less is watered down net worth. There are two big players who are in charge of adjusting inflation. First is the Federal Reserve, or just the Fed, aka the government branch that acts as the central bank for the United States. The second is commercial banks like Chase, Wells Fargo, you know, the heavy hitters. The Fed and commercial banks adjust the amount of money

in supply and interest rates, and therefore, inflation. The link between money supply and inflation is one we may have heard of before, but whether we've actually synthesized it is another question. I remember one day when I finally faced my inflation blind spot and thought, wait a minute, why is more money bad for the economy? That doesn't make sense. More money should be good, right? Well, it all comes back to supply and demand. Let's not worry about demand of money because we all know there's always a high demand for money. And just think about the supply of money. For our purposes here, supply does not just mean how much money is being printed by the mint, but how much money is in circulation, or rather,

in the hands of people, and importantly, trading hands between people. For example, in recessionary times, the financial world expects the money supply to be very low because people aren't exchanging money due to the fact that, duh, it's a recession. During tough economic times, money is hard to come by, of course. And if you do come into some money, you want to keep it close to the vest. However, that's problematic because when people don't spend money, the economy grinds to a halt. When I think about the American economy, I don't think about the big wigs and suits on Wall Street. I think about you and me. The American economy is really just a chain made by us, the consumers, with each link on that chain forged by financial transactions. This

interconnectedness works great when the economy is booming, because if one American does well, many others do well as well. But this is bad news when the economy goes down the drain, because the same rules apply. Many people are affected. Simply put, in recessionary times, when people have less spending power, the economy hurts. People don't buy their lattes, they don't go out to eat, they don't go back to school shopping. That means the owners of the local cafe, restaurant, and office supply store don't have any money coming in, and their business suffers. And when small businesses suffer, they lay off employees, and more links in the chain fall apart. The government, to keep the economy running, will want to boost spending power. And in order to do that, they do things like issue stimulus

checks. But they can also intervene with the money supply so that interest rates decrease and it's easier for people to borrow money and buy things. The government's rationale is if there's a recession, let's make it easier for people to borrow money so they have more money to spend. But it's not only individuals that the Fed wants borrowing money. It's also businesses. Remember those cafes and restaurants and office supply stores who needed to lay off employees? If businesses can easily borrow money, they can keep their employees happy and more generally keep the lights on. A quick dictionary note here. When the Fed looks to increase spending, it's called

expansionary monetary policy. When the Fed is looking to do the opposite, it's called expansionary monetary policy. When the Fed is looking to do the opposite, it's called contractionary monetary policy. So far, so good. Yeah. It seems like the solution of infusing the economy with money helps keep people employed and drinking lattes. That's a win in my book. However, when the government pumps money into the economy, it's often the case that the money supply is growing faster than the supply of domestic goods. This can result in two different kinds of inflation, demand pull inflation and cost push inflation. Both of these classifications come from our dear old friend John Keynes, a famous economist in the 1900s and a money rehab icon. Demand pull inflation describes the experience of Americans having more money to spend than

things that they can buy. Therefore, high demand pulls the prices up. For example, if interest rates on mortgages go down, that means that all of a sudden potential homebuyers can now anticipate spending less on the cost of housing, which means they have more money to play with. If that's the case, and then a bajillion people are flocking to housing tours on Saturdays and Sundays and looking to nest their faces off, housing prices can rise because people are willing to pay higher prices. In cost push inflation, costs are pushed up because of higher prices on raw materials. With the supply chain shortages, you can take your pick

on examples of cost push inflation. Semiconductor shortages mean more expensive TV sets. Labor shortages mean more expensive food in grocery stores. There's an example of this basically everywhere you look these days. I said this in a recent episode, but it's worth repeating because it's a bit of a newsflash. Inflation isn't always bad. Sometimes inflation doesn't make that big of a difference in our financial lives, but it's gotten a bad rap in recent years, mostly in part because of the things that do not keep pace with inflation. For example, minimum wage rates and salary in general. In the United States, when an employee lands a raise, they normally experience a 3% increase of their salary.

Guess how much inflation historically rises year over year? Yeah, 3%. The reality is that the salary increase you'll see at most jobs is not enough to keep pace with inflation, especially if you're working a job at the federal minimum wage, which has not kept pace with inflation since the 1960s. Inflation also makes the dollar weaker against other global currencies. The Fed is working on initiatives that will cut inflation throughout the year. But in the interim, prices are getting scary.

According to the New York Times, rents continue to pick up at a solid pace. And restaurant meals are more expensive, possibly a sign that recent wage increases are beginning to contribute to higher prices as employers look to cover higher labor costs. For today's tip, you can take straight to the bank. There are two ways to combat inflation. One, spend less. Two, make more. Now might be a great time to talk to your HR department if you work at a big company about a cost of living raise. Or if you're an entrepreneur big company about a cost of living raise. Or if you're an entrepreneur and sell some sort of product, you might need to raise your prices. Or you can spend less. And that doesn't mean cutting your spending plan. It may just mean

getting more creative about stretching your money and putting off purchases until inflation takes a tumble. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.