How To Explain Inflation To A Six Year Old

If your kids ask about it, we are here to help with Financial Education and a story about a dairy farm

“If you can't explain it to a six year old, you don't understand it yourself.”

-Albert Einstein

Inflation is a very important and serious topic right now for a lot of families. With the CPI (Consumer Price Index - fancy term for an a number that looks at various prices to determine inflation) registering over an 8% annual inflation rate in August compared to last year, we are all seeing prices go up in our daily lives making our money less valuable.

The situation is very hard on a lot of families and at the outset is worth stating that we at Future Funders don’t take what’s going on lightly (we will have some tips for things you can do within your power to protect your family in our next post).

For a young child, inflation can be even more confusing. You may not have the exact answer for why they can’t go to soccer camp this year or why the family can’t go out to eat as much. That’s why we wanted to give you a simple (and hopefully lighthearted way) to explain it to them so they understand.

At the very root of it, inflation tends to be a problem of supply (i.e. how much of something is available) and / or demand (how much of something is desired).

So how can you explain this in a way a six year old might understand? We would suggest a story about cows.

Let’s say your family has a family farming business. Your family owns a farm and on that farm you have three female cows (it’s a small farm) named Larry, Mo, and Curly.       

Every day, you start by buying food for the cows from the grain farmer, Joe. Then, you walk out to the barn where the cows live and feed them the most delicious grain mixed with hay, corn silage, and other feeds that keeps them well nourished and happy. You hang out with them, pet them, and talk and listen to them tell you about their latest adventures in the pasture. You even laugh at their jokes. 

In return, Larry, Mo, and Curly each produce about six gallons of milk per day. Because they are so generous, they let you take the milk, bottle it up, and sell it at the local grocery store normally for around $3 per gallon. 

Customers in town buy the milk of Larry, Mo, and Curly from the store and bring it home to their families where they are able to enjoy all the hard work of the three cows.

Everyone always says that your family farm is the best, and people can't wait to get their hands on the milk that comes from it because it is just so delicious! Larry, Mo, and Curly know this (of course!) and they go to bed with pride each night because they are able to help so many people. 

One day, a big storm blows through town and wipes out half of all the available grain harvest. The next day, when you go to buy grain from the Joe for Larry, Mo and Curly to eat, he tells you about the damage and asks you to pay a bit more for your grain.

He tells you that everyone still wants the same amount of grain (i.e. the demand for his grain has stayed the same) but he has less to sell because of the storm (i.e. the supply he now has is less). He still has the same bills to pay himself (like rent on his farm, food for his family) but only half the available grain to sell now because of the storm.

The result is that he has to decide how to sell his lower amount of grain in a way he can meet his expenses and also be fair to everyone who still wants it. So he asks you to pay a bit more for your grain that day.  

You understand the problem and agree to pay him a bit more for your grain that day. After all, the cows need to eat so they can produce their usual delicious milk!

Then on the way back to your farm the problem hits you. You start thinking about what you are going to do because you spent more money than you normally would on food for the cows.

As you feed Larry, Mo, and Curly you explain what happened to them and ask them for advice. They are very smart cows and suggest that since their milk is the best in town, why don’t you raise the price for the day to cover your costs? Then they go back to eating because they are hungry!

You think over their idea and realize they are right. So when the cows are done supplying you with their milk, you then take it and go to the grocery store as normal with the thought that you will have to charge more that day for the same amount of milk (to cover your expenses). Once you get to the store, you explain to the owner everything that happened and how you had to pay more for the grain because of the storm.

You then tell the owner of the store that even though you don't want to, you are going to have to charge more for your milk today because you still have to pay the same costs to keep your farm functioning and meet all of your bills (which are higher now due to the higher price you had to pay for the grain).

The store owner is very understanding and agrees to pay you a bit more for your milk. He then takes it, and puts it on the shelf.

But the owner now realizes he has a problem. He had to pay you more for his regular supply of milk from you and cannot charge the customer the same amount because he needs to cover his costs now which have gone up. So he decides the only way he can do this is to increase the price of milk that day for customers.

As customers begin to enter the store and head straight to buy their favorite milk from Larry, Mo, and Curly, they notice the price is higher than normal. The store owner explains to them the problem leading all the way back to the storm and the grain farmer; once he is done it becomes clear to customers what the problem is: inflation!

While the above is just meant to be a cute little story (there can be much more detail and nuance surrounding inflation causes than this), using something like the above can help our young kids understand what is going on in the world around them.

Furthermore, it illustrates one of our core beliefs here at Future Funders: most of finance and financial literacy is not complicated, it is just usually not explained in a way that people can understand or relate to. This is a problem with the industry and not us or our kids. As the famous Albert Einstein said at the top, “If you can't explain it to a six year old, you don't understand it yourself.”

In our next post, we plan to cover a few ways that your family can try to manage through this tough time, although in the meantime if you are trying to get a sense of how much your individual costs can rise, check out our inflation calculator here.

For a handy free budget template to help you manage costs during inflationary times, click here.

For books on inflation that go into more depth that you can read or read with your kids, check out our curated financial literacy library here.

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