For this week’s “Financial Freedom” post, I want to take a macro-micro look at how inflation is tracked using a purported “basket of goods.”
OK, so first it’s important to get our arms around what inflation is in the first place.
We all know that prices rise. You have probably heard one of your grand folks say something along the lines of: “In my day, I only had to pay a ‘Nickle’ to watch a double feature – that’s not one, but two movies, Sonny.”
But why is it that Gramps can regale his halcyon of youth sneaking of to the nickelodeon as being so much cheaper? The reality is that he really can’t.
See, while the cost of goods was cheaper, so was the cost of labor. As a percentage of income, the movies are almost certainly going to be no more expensive and in fact because of advancements in technology and distribution its almost certainly the case that as a percentage of income movies now are less expensive.
So, why do prices go up? Well, this is because our currency is backed by nothing more than the “full faith and credit of the US Government” – or in more technical words – a “fiat” currency.
And of course our faithful government leaders take their job of safeguarding the US economy for future generations seriously … right? WRONG!
Politicians “bribe” their constituencies all the time by passing bills which will secure big governmental projects for their jurisdictions.
Now, whether those projects are actually of much value or not, well that’s in the eye of the beholder, but it does get more money in motion.
Add to this the fact that our Federal Reserve has the power to “print” (or refrain from printing) money to keep the economy humming along and we have costs that keep going up and up.
But, let’s really take a step back. Imagine the upward trajectory of valuable products that have come in to existence since say the advent of the wheel.
Yes, we might have depressions and recessions which set us back, but overall the upward trend is always up. As a global society our trend line is always moving in that one direction.
OK, so now what does this have to do with the idea of a “basket of goods?”
Good question! The “basket of goods” is an aggregation of goods (and perhaps services too) which are tracked as to their cost over time so that we can not only identify, but quantify inflation.
And of course, here we go again with government work.
Sometimes I wonder what is actually in this “basket of goods.”
We all have to eat. So, there has to be food items in there too.
And of course we all need to have some form of transportation, we need to figure that out too.
Also, with the exception of those who walk or bike to work, gas is so important, presumably a tank load is included.
And so the list goes on and on.
But, here’s the point I want to make.
Does each person use the items in this basket of goods? Answer: Of course not!
We aren’t rationing out loaves of bread 1 per family of four as if we were “back in the USSR.”
No, differing people consume different baskets of goods.
Some people are going to spend much more money on good food and others are going to waste their money on Doritos and Coke.
That’s just the way the world is. We have a choice as to were we spend our money.
So, here’s the most important question.
What is in your “basket of goods?” In other words, what is it that you regularly spend your money on?
If, as they say, you follow the money, you are going to find out a lot more about you than you thought.
I never enjoyed the idea of balancing my checkbook and budgeting. That was too much of a hassle for my former self.
But when you start to track your money flows, you start to realize places where you are “voting with your pocketbook” for a future self that you might not want to be.
The task isn’t quite as tough as it would seem. But let’s leave that for another time.
For now, just think of it from the overall picture that you want to have good stuff in your basket of goods and how to make it better.
Have a great Thursday! I’m running late, so got to get off. Cheers!