Financial Education: Will Inflation Go Down?
Teach kids Financial Literacy while breaking down the question of has inflation peaked
“Inflation is like toothpaste. Once it’s out you can hardly get it back in again. ”
-Karl Otto Pehl
Inflation is best described as a rise in the general level of prices; we have written a good deal about it in recent posts (see the bottom of this post for links) as we feel these days it is such an important topic to cover. The rise higher in prices affects all of us, and when it comes to our kids, the topic can be especially confusing to understand.
In this post we are going to try to answer the question of has inflation peaked while also giving you a breakdown in plain language of important terms and key indicators you can keep an eye on to come up with your own opinion on the answer to that question.
We would encourage you also to involve the kids in watching some of these indicators as they are likely to see this inflationary time again at some point in their lives; giving them a firm grasp on what inflation means now can help them prepare the next time they see it.
As with anything, we would also encourage that you keep the discussion age appropriate and it’s perfectly ok if they don’t pick up on everything right away (most grown ups don’t understand inflation - most financial professionals also don’t understand it either by the way, they only pretend like they do!).
So lets get started discussing inflation with some key terms but before we do it is important to break down whether some piece of data we are looking at is what is called “backward looking” (meaning it is giving us information about the past up to this point) or “forward looking” (meaning it is giving us real time information or information about what the future could look like for inflation).
Backward looking information can help explain the various inflation pressures that have gotten us to this point (which is important to know) and forward looking information can be helpful in giving us an idea of where inflation might be going (what we are trying to answer today!).
We have broken down a few key indicators below along these two lines (also to help you sound smart to the kiddos!).
Backward Looking Information
Historical information — Lets start with a quick look at the past. The chart below graphs the inflation rate historically in the United States with the years on the x-axis (the bottom) and the inflation rate on the y-axis (on the right side).
As it shows from the increasing periods, besides what we are going through right now, we have had two other major periods of inflation in semi recent US history (there are countless examples of other countries).
The first period of high inflation shown on the chart below was around the time of WW2 (~1945) when there was a lot of demand for goods and services (largely because of the war and then post the war when everyone came home).
The second period was in the 1970s which was due to a few factors but mainly a supply problem of oil globally causing the prices to rise (OPEC proclaimed an oil embargo in 1973 on nations that supported Israel in the Yom Kippur War and the Iranian Revolution in 1979 sparked an energy crisis as oil production nearly halted in the country). These were largely external events that pushed oil prices and inflation higher (sound a little familiar?).
Both of those periods lasted about 5 to 10 years for contrast while we are about 2 years into the current higher inflationary period (if you look all the way on the right hand side of the chart that is us now). Logically, this might tell us that historically we are nowhere near the average time span yet of a high inflationary period (at least historically).
Consumer Price Index (CPI) — The Consumer Price Index or CPI for short is how a lot of people look at and measure inflation for you and me. The reason is because it basically tracks consumer spending through an average of different consumer product prices (think groceries, healthcare, rent) and then tells you what the increase was.
The index comes out every month with data for the prior month (so its backward looking) and you can track when the releases will be on the website here. The rate for September was 8.2% meaning that compared to last year at this time the average price on all goods increased by 8.2%.
This is slightly better than August when it was showing an increases by 8.3% but overall still not much of an improvement (typically for reference the US has had an average inflation rate in the low single digits and the Federal Reserve targets a 2% rate meaning that is what they would like to see on average- should you want to see how inflation rates have trended in history check out our handy inflation calculator here).
So, while this data is backward looking, what it would tell us today is that inflation is still high and we would be looking for this number to come down.
Personal Consumption Expenditure (PCE) — The Personal Consumption Expenditure or PCE for short is another measure of consumer prices similar to the CPI. Also similar to the CPI (the category weightings and some other ways of measurement are different which is why the numbers are not the same), it is released every month, and you can track it here.
If you start to see this going down or decelerate (meaning the pace of increase is going down), similar to the CPI, this may be a sign that inflation is getting better.
Lastly, we would note that anytime you hear the words “Core Inflation” when it comes to the PCE or the CPI above, this is just a fancy term for excluding food and energy (i.e. gas) costs as a part of this monthly number as the argument is both of these are volatile and change a lot.
Now, when talking with our kids about the above, you can track these prices every month (we would suggest putting the release date on the calendar). This can be a great teaching tool and learning point to help the kids see some of the indicators on how prices have been trending.
It may also be helpful to do so through encouraging reading books together if they are older (we have several good inflation books at our curated financial literacy book library here). If they are younger it may be helpful to start by show them how prices fluctuate when you are out shopping or have them learn themselves (we have a great printable workbook available here).
Forward Looking Information
Producer Price Index (PPI) — The Producer Price Index or PPI for short is a key gauge of the cost of goods before they reach consumers. The data is backward looking as it measures the change in prices paid to US producers of goods and services from the prior month but it is actually forward looking for what the consumer may ultimately pay going forward.
The reason is that all of our goods and services are made or produced somewhere. If prices to the company or place making our good or service increases, this likely means that when the product gets to us at the grocery store (for example) it will also increase.
A good example of this would be a farm producing milk and sending it to the grocery store for us to buy. If their prices go up, financial decisions will be made and we will likely have to pay more for milk (and opposite if they go down).
As a consumer, you can look here first to see if prices are starting to come down as a way to see if inflation for you as a consumer may be coming down in the future. Similar to the CPI and PPE above the data is released every month and you can track it with the kids here.
University of Michigan Surveys of Consumers — The University of Michigan Surveys of Consumers ask a sample of US households about the change in prices they expect during the next year and the average change in prices they expect over the next 5 to 10 years.
Readings are reported twice a month based on a preliminary release and the final results from the surveys. This is something that can tell you about where people think inflation is going and can also be helpful to keep track of with the kids (for more information click here).
Real Time Price Observation — Another potential forward indicator for inflation and where it may go that can help teach the kids is looking at real time price changes. Whether it is out on a drive or at the grocery store, have the kids record prices they see of various items (like milk or the price of gas) and keep track of how they are trending when you see them again.
Sometimes seeing it in real life will help them really learn the lessons talked about above (it can be helpful to see it for ourselves vs. just looking at a chart!).
Overall, there are many potential ways to track inflation in addition to the few suggestions we have listed above. We would also suggest that you don’t have to track all of these, instead you can pick one or two that you think may fit best and go from there. The overall point is more to just begin talking to them about it.
What we believe (your opinion is just as possible as ours!) is that higher inflation is going to be with us for a while, so learning how to deal with it and teaching our kids how to be prepared will be an invaluable skill to give them for the rest of their lives.
For more on how to get started explaining inflation to young kids check our our post here. To find ways to teach them through games click HERE or if you are looking for a few ways to protect the family against it click here.
We are always here with any questions or concerns (we are here to help!) so please don’t be shy about commenting below or submitting a questions or comment to us here.
For a helpful inflation calculator to calculate inflation click here.
For our library of financial literacy books that can help teach inflation click here.
