Inflation

Inflation is the rising cost of goods. Economists use the idea of the imaginary basket of goods and services that people can purchase. When they compare the prices of the same basket of goods over time, the rate of inflation can be calculated. So when grandma bought butter for a nickel a pound (or whatever) and we’re dropping a $5 bill for the same pound of butter (well, not exactly the same pound of butter… hopefully one made more recently) then some smart economists somewhere will crunch those numbers and compare it with the timespan between grandma’s shopping trip and our shopping trip to determine the rate of inflation.

The average inflation rate is…

[drum-roll please]…

… not easy to find.

I was on the Bureau of Labor Statistics  which is supposed to tell me. I was hoping for a great big ticker that gave the number. But no. Instead there was a lot of confusing statistics that might be an actuary’s idea of heaven but not mine. I guess the theory is that there are different indexes for whether we’re talking about inflation in consumer goods or inflation in health care purchases or inflation in residential purchases.

So I did what all good amateur researchers do: I went to Wikipeda.  There, they said that inflation in 2007 was 4.28%. That means that prices rose 4.28% between 2007 and 2008. I’d heard that inflation was typically between 3% and 4% (and the economy was pretty good then and since inflation tends to be higher during good economies the 4.28% number makes sense).

Why does this matter?

It matters to you for a couple of reasons:

First, it matters because when you’re investing your money you need to make sure that your investments at least outpace inflation. There are lots of investments that claim to be safe but don’t even keep up with inflation. So an investment that looks like it will earn 2.5% sounds okay but you’ll end up with less money. Investing in your business might not give you a sense of an “assured return” but it’s likely going to be better than inflation! (Disclaimer: Our trusty troupe of high-paid lawyers tells me that I need to mention the following: IAC-EZ is not in the business of giving investment advice and that the above paragraph should not be construed in any way as anything other than my own observations and feelings and actual advice that anyone should follow and if you’ve read this far you acknowledge that we are an awesome bookkeeping service and not financial advisors).

Second, and probably more important for you as a business owner, it matters because you will need to increase your prices from time to time and you need to make sure that you’re at least keeping up with inflation. A 10% price increase is, in reality, a lower increase. In 2007 a 10% increase would have really only increased your revenue by 5.72% because the rest would have been sucked away by inflation. Remember that when adjusting your prices! And remember, too, that different industries have different inflationary rates to consider.

Jessica Routier, IAC-EZ

Jessica Routier

Jessica wants to talk to you! She is who coordinates the contests, travels to all the conferences, and interfaces on a fun level with customers on a daily basis in order to bring our users together as a community.

Jessica has a B.Admin and an MBA. Her background in business, along with a diverse skill-set (including a diploma in Medical Transportation, retail experience, and experience as a paralegal) make her a valued, highly flexible team member.

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