Inflation may be the single most important piece of financial literacy you can pick up and use in life. When you get it, you’ll sleep easier, make more confident choices, and probably feel better about politics too.

• The inflation of household prices that swept America the last two years had fallen by mid-Summer 2024, but the shock and emotional impact of those price increases are still here. The election showed that Americans just really wish prices would just fall back down.
• Public officials tend to under-communicate this truth: Prices don’t outright fall. Or if they did—i.e. deflation—it would only come with major unemployment and other significant crises. The “fall in inflation” that’s occurred in 2024 just means that prices aren’t going up as drastically.
• In fact, the stated goal of the government (the Federal Reserve) is to have prices go up slowly — never flat, never falling. Always inflating. Why? Because historically, that’s the way we've balanced growing companies, fully employed households, and healthy consumer spending.
• When you accept the idea that prices will keep going up at 2-3% annually, and there will probably also be future short-term crises like we experienced in 2022-2023 (7-10% inflation), it can be very empowering. Not just for your personal finances, but for the rest of life admin too.

The thing politicians don't tell the public is this: prices can't outright fall—at least not without major pain. Let’s use a few examples to illustrate.

Here are two things I think many people wish would happen in America.

“I wish the price of eggs would go from 4.99 to 1.99.”

‍For that to happen, basic economics says two things would need to happen:

• Option A: More eggs would need to be available (more supply)
• Option B: Fewer people would need to be buying eggs (less demand)

While producing more eggs might be possible over time, if we wanted prices to fall quickly, we’d need significantly fewer people to buy eggs pretty quickly. Imagine a world where that happened. I imagine people not having the cash to buy them — unemployed or under-paid, feeling a great deal of pain. So far, that hasn’t happened. Even in these recent years of high inflation, employment has been relatively healthy, and people have been able to buy plenty of eggs, boosting the price as egg production has seen limitations.

“I wish the price of a house I want would fall from $600k to $300k.”

‍Similarly, two main things can happen.

• Option A: Many more houses like that would need to be available in the area
• Option B: Far fewer people would need to want a house like that

Option A sounds great. But imagine what that might do the area. The interesting constraint of real estate is that space is limited; there’s only so many houses that can be built in a certain area that are the same kind of house. If you consider Option B, you might imagine the different reasons why fewer people want a certain house. Maybe the neighborhood has begun falling apart. Maybe problems with that kind of structure have been uncovered. In either imaginary case, the current owner of a house would lose a great deal of money if the value of their house fell by 50%. If you were the owner, you’d probably do everything you could to avoid that situation.

No matter how collectively frustrated Americans feel about the recent years of high inflation, if you consider the examples above, we would probably feel far worse facing a rapid fall in prices. This mismatch between our ideas about inflation and the reality of how inflation really works affects massive events like elections, but it also shapes our individual lives and choices.

If there's one piece of financial knowledge you should take away about inflation, it's this: In a healthy economy, inflation is always there.

‍Not at high levels like 7-10%+, but at 2-3% per year.

That means, on average, if your household budget is $50,000 this year, by the end of next year, it will be more like $51,000.

Important note: Not everybody experiences the average — some people's prices inflate a bit more and some a bit less depending on what your expenses are.

Will the presidential election outcome change inflation?

Now that we know that Trump will be returning to the White House, there might now be a few additional reasons to embrace the existence of inflation too:

• The Fed vs. Trump: Trump has been a proponent of influencing the Federal Reserve to drive down the interest rates that banks are subject to. If he chose to intervene heavily at the wrong time, it could interrupt the Federal Reserve's ability to keep inflation under control.
• Tariffs increasing prices: The other factor Economists are uncertain of is whether Trump will impose new tariffs on foreign goods in a way that would drive up prices on everyday goods. Clearly, Trump believes this policy would help the economy, but there's a difference between policy ideas and what they do in practice.
• Lower taxes; more demand: In addition to the Federal Reserve's role in controlling inflation through interest rates, the other big policy area that can shape inflation is taxation. President Trump has floated ambitious and radical ideas like completely removing the federal income tax, so as wild as that seems, lower taxes could certain affect how much inflation we experience.

When you accept the realities of inflation, it can be extremely empowering for how you live life and manage your admin.

Here are seven things that tend to happen when you start taking inflation's existence to heart:

1. 💸 You begin seeing the risk in not putting cash to work productively.

When you know that your dollar isn't going to go as far next year as it will this year, it creates some mental clarity about having it earn value. That could mean earning interest, investing it, or spending it on something important.

Instead of thinking about cash in your checking account as strictly safe, inflation helps you realize the importance of moving it somewhere more productive.

2. 📈 You anticipate that far-off purchases will be more expensive than they are today.

Whether its college for your young kids or long-term care for you, holding the idea of inflation in your head helps you set better expectations for what costs will really look like once you get there. It also increases the usefulness of inflation calculators. Since different goods and services increase prices at different rates, there are some great tools available for this purpose:

• College expenses calculator (Vanguard)
• Long-term care calculator (Genworth Long-term Care)
• Location-based cost of living calculator (Bankrate)
• Retirement needs calculator that takes inflation into account (Nerdwallet)

3. 🗓️ You realize your budget has to adjust upward slightly every year

If your household budget was $50,000 this year, next year it will be at least 2% more. What does that mean? You probably want to plan for ways your income also increases to keep up, or plan accordingly for your savings or spending to go down over time. In terms of life choices, there are many paths:

• Participate in a union to ensure you're advocating for wage increases
• Take on different ways of generating income in addition to your main job
• Anticipate career changes that lead to raises
• Invest in your ability to negotiate your salary effectively
• If retired (or soon to be), make sure you're retirement investments and Social Security are planned to grow your income over time.

4. 🏔️ You consider choices like where you live with an eye toward costs increasing over time

Different locations have different costs of living and different benefits too. When you have an expectation that a low level of inflation will always be there, you might consider the pros and cons of living in a more expensive place at one point, while eventually moving to a lower-cost place later—or vice versa.

There are many ways location and new opportunities can offset the effects of inflation.

5. 💰You ensure your emergency fund grows with inflation (and your lifestyle).

It's common financial advice to build up a cash emergency fund of 3-6 months of expensees, even before paying down some forms of debt. What's less commonly talked about is the importance of ensuring your emergency fund grows once you have your baseline set.

Your costs will increase, plus your lifestyle can increase too, so it's important to keep on topping off your emergency fund, and ideally, have its value grow.

• High yield savings accounts are a great, risk-free way to ensure your emergency fund growing.
• There's also the option to invest your emergency fund with a bit more risk (albeit diversified risk) to give it a better chance of keeping up with inflation. The digital financial advisor, Betterment, has gained some fame for encouraging that solution.

6. 🔒You appreciate fixed rates, like a mortgage, in years of high inflation

An inflation mindset also helps you appreciate any "fixed rate" you experience in life. The most prominent example of this is a fixed-rate mortgage. Fixed rates mean that for the entirety of the time you're paying the mortgage (or any other loan with a fixed rate), you pay the same rate, even if inflation goes up or down.

Homeowners who locked in low fixed rates before the inflation increase of 2022 could appreciate them because, the money they were paying on their mortgage stayed stable, even as other costs increased. Other people, like renters, who experienced rent hikes weren't so lucky.