Dec 6, 2021
Inflation Doesn’t Have to Suck
But it does in 2021.
Normally, inflation quietly erodes our potential wealth, but this year inflation is hitting like a truck and making headlines every day.
Here’s something mindblowing: wages have risen 5% over the last year, but our actual ability to buy stuff has fallen 1.2%.
Despite making “more” money, we’re all getting paid less. What?
It’s because inflation is negating all these gains.
Let’s say we normally make $100 and spend $100. If we now get a raise and make $105, that’s great! We have an extra $5 of cash on hand to invest or treat ourselves with.
Now let’s say inflation kicks in and makes everything cost $105, then despite getting that raise, we’re now making the exact same amount.
Stepping Back
I want to pause and point out inflation actually reached 13.5% back in the 70s, but this isn’t the 70s. Over the last decade, we’ve seen inflation stable around 1–3%.
This is our baseline expectation.
Anything that deviates from this shocks us, especially when we’ve seen prices at the pump surge over the last year.
Now, what’s causing all this inflation?
There are tons of theories that all could make sense:
- Serious supply chain shortages in 2021 (remember Evergreen?)
- Surge in demand trying to spend the wealth we accumulated in 2020
- Labor shortages that forced companies to pay more in wages, but also then raise prices to cover the increased wages
- Enormous money printing and thus available dollars
Unfortunately, there isn’t a convenient smoking gun to point fingers at.
Now, none of this would matter if we were at least getting wealthier overall by getting raises that exceeded inflation over the years, but we’re not.
The yellow line in “current dollars” is the amount we see ourselves making, which, yes, has gone up over the last few decades, but when we adjust for inflation, we’re making about the same…
Even in this wild year, where wages rose by 5%, we’ve actually continued to lose out.
If I’m being technical, this still doesn’t matter since even if our purchasing power has stayed the same, the quality of the goods should’ve risen over the last few decades (and they have! — cars are safer, healthcare is better, and we have phones that can do so much more).
But it hurts knowing that we’re not making more after all this time and hurts even more knowing that the rich are actually getting richer after adjusting for inflation.
What to watch
So yes, inflation in 2021 sucks.
There’s not too much any of us can do about inflation, but we do often have a say for the other lever: our jobs.
If you haven’t gotten a raise this year, push your manager and bosses on it, and feel free to cite inflation because companies are definitely taking advantage to raise prices.
And if they don’t, consider changing jobs. The market is hot and companies are having to shell out to hire workers and this means bigger salaries, sign-on bonuses, and perks.
In the meantime, follow along as I explore different ways of protecting wealth and investments against inflation.
And maybe, just maybe the Federal Reserve can fix this without misstepping.
