Teachable Moments Series

Teachable Moments: Inflation

Inflation (price increases) means your money will get you less tomorrow than it will today. This concept is important because it has an impact on salary increases as well as savings rates.


Here is one example:

Tell your child you are giving them a salary of $1 for the month and with that $1 they can buy a favorite treat for $1. Next month, increase the salary by 10% or $1.10. Aren’t they feeling great? They have $1.10 now when they only had $1 last month. However, the cost of the same item has gone up 20% to $1.2. Ask them whether they can buy the treat now? The answer is no. Inflation makes goods more expensive over time and to keep up financially your salary/wages have to grow at least at the same level or more than the cost of the goods.


Here is another example:

Sometimes retailers try to hide inflation. They do this by not changing the price of an item, but by making the amount that you get for the same price smaller. Give your child $1 and let him or her buy one item with the money. Next month, give the child $1 and let him or her buy a smaller version of the item with the money. Does the child feel better off or worse off versus last month? The price has not changed, but the amount that the person can get for the price does.

Why does inflation make the price of things go up?

This will probably be a question. The simple answer (and there is no really simple answer) is that costs of material, salary increases for employees, etc. all contribute to making the price of items increase. If your salary does not increase accordingly, you have lost money without even being fully aware of it at first.

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