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What You Really Need to Know About Inflation – Shortcast

The word inflation is used all the time, but what does it really mean, how do we measure it, and what happens when we try to reduce it? Let’s talk about it in today’s shortcast.

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Transcript

Hi, this is Steve Rhode, your Get Out of Debt Guy from GetOutOfDebt.org.

In today’s short cast, let’s talk about inflation, what it is, what it means, and why pursuing lowering inflation can cause people to lose jobs.

At a gut level, you hear the word inflation, and many assign blame or political dispersions but is that reasonable and fair?

So what is inflation? Inflation occurs when there are broad, rapidly increasing prices in a category of goods and services, not just rising prices of individual items.

The measurement of inflation is not as straightforward as you might imagine. All sorts of indexes and analyses are used to calculate an inflation number. You might have heard about two of these measurements: the Consumer Price Index and the Personal Consumption Expenditures price index.

But alone, indexes measuring prices do not calculate the rate of inflation. Instead, inflation is the increase or decrease of one or more price indexes over a given period.

So what actually causes inflation. A few significant categories can lead to the higher price of goods or services.

Prices can increase if there is a shortage of goods or services.

Inflation can occur if the cost of producing goods and delivering services increases.

If workers demand higher wages during periods of low unemployment, that can cause inflation as businesses have to increase prices to cover costs. This typically happens in a growing economy.

Most underlying inflation factors are not caused by the political party in office. For example, there are more causes of inflation, like broken supply chains, a war in other parts of the globe, emotional uneasiness with the economy, and more.

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Take transportation-related inflation, for example. Higher gas prices and vehicle manufacturing supply chain issues lead to higher transportation costs. But those car manufacturers’ supply chain issues began at the start of the pandemic as demand declined and orders for computer chips were cut back. We’ve been playing catch-up ever since.

But since this is a short cast, let’s keep this topic of inflation simple.

You might have heard about the Federal Reserve increasing interest rates to control inflation.

Why do they do that?

Think about it like this: consumers will begin to borrow and spend less when borrowing money or carrying balances on credit cards with increasing interest rates becomes more expensive. Conversely, when consumption declines, prices fall, and the inflation rate slows.

If interest rates are modified too much, the economy’s desired slowdown can overshoot the target. A rapidly slowing economy with high-interest rates can lead to too much of a slowdown, which we call a recession.

The art of managing inflation is to apply the right amount of increase in interest rates to ease the slower growth and demand while not causing too much damage.

If you think inflation is horrible, let’s not forget that worker damage is the byproduct of slowing inflation. When growth slows to reduce the costs of goods and services you pay for and complain about, a knock-on effect is a reduction in employment.

If fewer people are buying or paying more, payroll gets reduced since the cost of staff is one of the most uncomplicated costs to cut back on. It’s hard to shrink a factory, but people are disposable without job protections. See ya.

The whispers are white-collar jobs will be the most at risk as employment is reduced to counter slower growth. Careers in real estate, banking, tech, and business services are far above what they were before the pandemic.

Entry-level white-collar workers are probably first on the chopping block.

William Lee, the chief economist at the Milken Institute, said, “The entry-level white-collar guy is going to have to watch out. That’s going to be the surprise in this downturn,” he said, adding that some lower-skilled white-collar jobs were vulnerable to replacement by apps or automation.

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Unlike in other economically challenging times, blue-collar workers have less to fear when it comes to job loss. For example, Lee said, “The Joe Six-Pack, who used to be the first guy to be laid off, can be less concerned if he has one of these jobs that are in high demand, like the Amazon warehouse worker, delivery guy, the guy who’s working in the ghost kitchen.”

There is no current consensus on whether the United States will be in a recession. The best experts can do is guess, and currently, economists are split 50-50 if a downturn is coming.

Ultimately, it doesn’t matter if we are technically in a recession or if inflation is being managed. What matters most is what you are feeling about these issues. Emotions win out over facts every single day of the week.

Thank you for listening to my short cast on inflation.

Be sure to subscribe to my Get Out of Debt Guy podcast, so you don’t miss a future episode.

So, for now, this is Steve Rhode, your Get Out of Debt Guy. Wishing you success, peace, and happiness till next time.

Bye Bye

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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