Does Inflation Really Impact Your Day-to-Day Lifestyle?

Everyone is talking about inflation. That the government is printing too much money and messing with rates and basically that our economy is going to collapse because no one will be able to afford anything anymore.

In short, I don’t believe this is true.

But whether you believe it’s true or not, let’s look at the really important question: does inflation increasing from the normal 2-3% to 5-6% really impact your day to day lifestyle?

For the majority of people, I think the answer is no.

Why? Because inflation is a supply and demand issue. That’s why printing money contributes to it. If there is too much money and not enough goods to buy, we have inflation. You can see this with the housing market. I have a client that called me today and said they found a house they liked that was listed for $740k. They offered $850k and didn’t get the house- there were 37 other offers, many of them cash with waived inspection, etc. Too much money (37 people with pre-approvals who want to buy a house at current mortgage rates) and too few goods (not enough inventory in that town) means the price gets driven up. A house that may really only be worth $800k can sell for $900k or more. That’s what inflation looks like across other categories like groceries, rents, gas, etc.

If you’re looking to buy a house, of course this impacts you, but this housing issue has been going on for several years and has very little to do with recent increased inflation and has a lot to do with low mortgage rates meaning people can afford a lot more house on a lot less income.

What really should matter to you is the cost of your lifestyle relative to your income. Just like the cost of goods increases when inflation goes up, so does the cost of labor (i.e. salaries). Even if yours doesn’t immediately increase, you have to look at which of your costs do. Do you have a fixed mortgage or are signed onto a rental lease? Your housing expense which for many people is their biggest expense is flat. Other big fixed expenses that don’t change on you overnight? Cable and internet, cellphone contracts, your energy costs (gas and electric bills), car payments, student loan payments, etc. Cost of groceries and gas might go up, but how many times do you fill up a week? And is all of your driving necessary? Can you find ways to minimize that expense? Same with groceries, the cost of steak might go up, but can you buy chicken on sale? Etc, etc.

Many, many costs went up during the pandemic. I got a quote for vinyl siding pre-pandemic and a few months later the revised cost quote was over 30% more. There were lumber shortages that spiked prices. There were also (and continue to be) chip shortages causing reduced supply of cars. The question is, when these costs go up are you forced to pay them? And are they permanent? The answer is no.

The siding I had quoted was expensive so I had someone come out to repair areas I needed repaired so I could wait on full replacement. There is limited inventory for cars so the clients I are in the market for new (or new to them) cars are holding off to avoid overpaying. Those who have to buy are able to finance at super low rates which they’ll be locked into and which allow them to invest the money they otherwise would have spent in cash at higher rates than they are paying on that debt.

Because when inflation happens, the stock market also tends to trend upwards. It isn’t behaving that way now because of fear and irrational behavior of investors, but when the cost of goods and labor go up, so do the costs of businesses and their profit margins as well which impacts their value aka their stock price.

Long story comes full circle, instead of freaking out about inflation in general, it’s much more productive to look at which of your expenses are actually going to be immediately impacted by the increase. If those are low or virtually non-existent, move along and don’t sweat it. When supply is low and the cost of goods is high, people see an opportunity for profit. It’s natural behavior. If houses are selling for way over asking, you might want to sell your house. Chances are, you aren’t the only one. Multiple people trying to get into a hot market to capitalize on selling creates an increase in supply, which drives down prices because now supply is starting to offset demand, and the cycle goes on. This counteracts inflation.

Wasn’t that fun?