As counter-intuitive as it may sound, we actually need inflation in the economy. Yep, you read that correctly; without inflation, people expect prices to decline. When prices decline, no one buys anything unnecessary because they know if they wait, the price will be lower. Not a bad way to save money, but not a good way to run an economy.

As mentioned in my January 20, 2011 post, Our Food is Inflating, the prices on all kinds of food commodities are going up. So, based on the paragraph above, you think this is good for the economy. However, while we're seeing pressure on the cost of food, which could be showing up soon in restaurants and grocery stores, we aren't seeing an increase in the cost of wages to pay for that increase in food prices.

Unfortunately, with so many people unemployed, employees don't have much bargaining power when it comes to wage increases. Most people feel lucky to have a job, and as a consequence, we've seen only a 1.5% increase in wages in each of the last two years (2009 and 2010). That's the reason we really haven't seen the double-digit inflation of the late 1970's and early 1980's: there hasn't been an upward pressure on wages. Imagine what our economy would be facing if that were the case.

So, the lucky ones are those who are still receiving a pay check, albeit with only a slight increase. Although much more fortunate than those who aren't receiving a pay check at all, this lack of an increase in wages will become more problematic if there is indeed inflation on another front. This is a definite possibility, especially when it comes to food (I know Oreos go up every time I enter the grocery store). In the past six months we've seen substantial increases in the price of sugar (my favorite), coffee (think: America's love affair with Starbucks) and wheat (a staple in every country's food production). This will put upward pressure on the money left over for other things in life. 

Although you're employer may not be giving you a raise, you can actually give yourself a raise. How? Easy; by seeing where your money goes you can see where you can cut down on expenses.

CategoriesSaving Money