The Three P's of Inflation

It feels like inflation is everywhere.

Whether you read about it in the headlines or experience it at the gas pump or grocery store, it is hard to be unaware even if you try.

While paying higher prices can make you sick to your stomach and tips about I-Bonds can trigger FOMO, there are a few reasons to take headlines with a grain of salt and stick to your plan when it comes to your own finances.

Inflation is personal.

Inflation is not a flat fee that is applied to everyone and to every dollar you spend. It is personal and is based on how and when you choose to spend your money.

Commuters will experience inflation in gas prices differently than those who work from home.

Young families with many mouths to feed will experience inflation in food prices differently than empty nesters.

Travelers will experience inflation in airplane tickets and hotels differently than home bodies.

Taxes, mortgage payments, charitable gifts, and even other large line items in many personal budgets have likely not been impacted by inflation at all.

Inflation in the headlines is different from the inflation experienced in the individual household.

Your personal experience with inflation is the one that you can feel day-to-day and the only one that matters for your own finances.

Inflation can be participatory.

Businesses charge for value delivered to customers or clients.

This value can come in the form of a chicken sandwich, a subscription service, a couch, or a million other things.

There are times when businesses must increase their prices to cover their costs and there are times when businesses can increase their prices because they deliver value to their customer or client above and beyond the existing price.

Both scenarios lead to inflation AND both scenarios typically lead to a company remaining profitable or even increasing their profitability.

These profits do not go into a black hole never to be seen again. Instead, these profits are captured by the owners of the businesses to be distributed as income or reinvested in the business to further increase its ability to provide value.

Instead of only paying inflated prices, investing in a diverse portfolio of companies over time allows you to participate in the profitability and growth that often accompany inflated prices.

Inflation is not permanent.

Of course, everyone would like to participate in the profitability and growth part of inflation, but herein lies the beauty of competition.

Competition creates incentive for others to jump into the fray to claim their “share” of the profitability and growth.

Oftentimes, the easiest way for these latecomers to capture their “share” of the profits is by offering a similar product or service for a reduced price which in turn keeps prices from racing to infinity.

While the precise magnitude and duration of inflated prices can be difficult to predict, the inherent nature of competition naturally keeps inflation in check and helps prevent temporary price surges from becoming permanent.