I hadn’t eaten McDonald’s in well over a year but a couple of days ago I was limited on time and options and I didn’t have much of an alternative. I proceeded to go through the drive-through and without really looking at the prices ordered the only thing I would ever eat from McDonald’s, a #10 – 10pc Chicken McNuggets with medium fries and a medium Coke (Not that this is a healthier alternative to anything else on the menu).
As a broke college student, I did this quite regularly so I knew exactly what to expect for the cost of my meal – $5.15.Rising Inflation McDonald's Receipt
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I pulled the car around to the cashier's window and my surprise, the cashier said “That will be $6.48“. I stopped and stared at her somewhat puzzled and then quickly reached into my back pocket for my wallet, realizing there were hungry people behind me, still somewhat in shock. I took out enough to meet my charge, received my order, and pulled away in disbelief.
Even as a college graduate, I had a very limited financial IQ and I didn’t understand the causes and effects of inflation on my money or how rising inflation effected me. It wasn’t until after I graduated college that I realized I was dangerously behind in the most important subject in life and I took it upon myself to do the research and educate myself on how money worked.
I don’t mean to insult anyone’s intelligence if you’re in complete understanding of the effects of rising inflation but please understand that, like myself even as a college graduate, there are many people out there who don’t understand how inflation impacts them and their money.
Simply put, “Inflation is the rise in the general level of prices of goods and services in an economy over some time.” -Wikipedia
When the price level rises, each unit of currency (dollars) buys fewer goods and services. In other words, inflation is the erosion in the purchasing power of your money – a loss of real value in the internal medium of exchange and unit of account in the economy.
Current Inflation
Rising inflation is a very bad force in the economy. In essence, inflation is the destruction of a currency and erosion of your purchasing power – this means you buy a lot less with the same amount of money!
That is exactly why when I pulled into McDonald’s a couple of days ago, my meal was no longer $5.15 like I remember it being when I was in college as early as 2008. That very same meal today was now $6.48. That represented a change in cost of $1.33 and an increase of 25.83% in the overall price.
This means that at McDonald’s my money now buys 25.83% less than it did just 3 years ago.
I know I’m just focusing on McDonald’s for this example but the reality is prices for consumers are going up in almost all sectors of the market and I’m sure you’ve noticed.
As I write this essay, gas prices are rising and are at an all-time high nationwide. Just the other day, I spent $60 to fill up my gas tank 3/4 of the way when just last year I was able to fill up my gas tank with about $50. The U.S. Labor Department reported that over the last 12 months, energy costs soared 15.5%. The Energy Index, which was led by gas, took a giant 27.5% leap. Prices at the pump were up 5.6 percent from the previous month, in March alone.
Of course, gas is not the only thing going up in cost these days. As you may have also taken note, grocery prices are rising as well. In March, food prices were reported to have risen to 2.9% over the last 12 months.
Why Rising Inflation Should Matter To You
All in all, Inflation in the United States was 2.7% in March 2011 – an increase from 2.1% in February 2011 and the biggest year-over-year gain since 2009 during one of the deepest ends of the recession.
The reality is that Inflation has been rising at rapid rates since the 1970s when the United States officially decided to drop the Gold Standard and create a complete fiat currency – a currency whose value is determined solely by government regulation as opposed to a commodity like gold or silver. This allows the government to print as much money as it wants without really having anything to back its value other than the confidence of other nations in that the value of the dollar is really what we claim it is.
Today, rising inflation is the reason why most homes require 2 incomes to barely scrape by and meet the increasing costs of living. Unfortunately, everyone feels an increase in the costs of products and services in the market, including employers.
Higher prices to employers usually mean that wages stagnate, hiring ceases, people lose their jobs, get behind on bills, and in many cases lose the one asset they’ve worked their entire life to build – their homes.
When more and more of your dollars buy fewer and fewer products and services you can no longer afford to spend as you used to and your standard of living changes. You can no longer afford the clothes, the new widget, or even the night on the town.
If you think this is a U.S. problem and inflation doesn’t affect you, think again! Almost all countries base the value of their currency on the U.S. dollar, so an inflating dollar has a domino effect on other currencies including the one in your country!
I Have Good News… and Bad News
The bad news is you have no control over rising inflation. There is nothing you can do about the causes of inflation or how much purchasing power you lose. The good news is all you need to do is gain more dollars!
No, I’m not suggesting you go out and look for another job and forget about trying to save money! What I am suggesting is that you invest and make your money work for you so that you don’t have to work for your money!
I’m not a financial planner but anyone who has a decent understanding of the markets knows that you can take earned income and invest it in commodities like gold, silver, or other precise metals (usually great hedges against inflation). Another approach would be to invest earned income in an Internet Business that you can build over time with a lot of hard work but that will produce one, two, or even ten streams of residual and passive income for you in the future.
In the end, it doesn’t matter if Inflation increases by 5% or 10%. The only thing that matters is who is earning the most dollars. Inflation will continue to increase over time but money will not stop flowing. The only sure thing is that standards of living will significantly decrease as inflation increases for those who are not financially prepared. Some people will work harder at a job to attempt to keep that job. The people who usually prevail, however, are the ones that invest for the future.
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