4 Pervasive Myths About Inflation

Inflation can feel inescapable these days.

For most of us, it also feels like inflation is higher and more persistent than it actually is.¹

That could be because we’re seeing higher prices practically everywhere.¹

Despite our experience, though, that misperception can actually harm us. It can also be bad for inflation in general.¹

That’s because thinking inflation is worse than it is can stoke our fears of rising prices and compel us to rush into buying things ASAP (before prices go up again).¹

With that, the price hikes we’re afraid of can become a reality.¹

In other words, our misconceptions about inflation can turn into somewhat of a self-fulfilling prophecy.¹

They can also influence our evolving money habits and our bigger-picture plans.¹

To keep all of that on track through whatever inflation brings, it helps to know the facts — and to be able to discern them from the myths.

With that in mind, here are a handful of inflation myths that start to fall apart by looking at the facts.

Myth 1: Inflation Is Always Bad.

Fact: Inflation can be positive in the right conditions.

Inflation may not feel good, but it is not always bad. Sometimes, it can signal economic growth.²

In fact, many economists believe that low, stable, predictable inflation can be good for the economy.² That type of inflation can reduce uncertainty and allow for better planning around spending and savings.²

That’s one reason why the U.S. Federal Reserve set an “inflation target” of 2% back in 2012, establishing a clear bar for preventing deflation (i.e., when the inflation rate falls too low).³

Myth 2: Inflation Affects Everyone Equally.

Fact: Inflation impacts different groups in distinct ways.

Inflation can dilute the purchasing power of everyone’s dollars, but that doesn’t affect everyone in the same way. That’s because factors like (and not limited to) the following can heighten or dampen our sensitivity to inflation:

• Income: People on fixed incomes, like retirees, can be much more vulnerable to the price hikes of inflation.
  
• Debt: More debt can also amplify the effects of inflation, restricting what people can buy with the disposable income they have left after making their monthly debt payments.
  
• Renting: Renters can be subject to inflation in their rent costs while homeowners with a fixed interest rate on a mortgage can generally maintain predictable housing costs through inflation.

The differences here can have a silver lining too — they highlight how it can be possible to start insulating yourself a little better from the possible impacts of inflation.

Myth 3: The Government Alone Causes Inflation.

Fact: Several factors can and do play a role in inflation.

Government policy can certainly contribute to inflation, but it’s not the only factor involved. Weather, supply chain issues, global conflict, and even new tech (like AI) can factor in too. So can our expectations about price changes.

It’s the complex interplay of these dynamics that’s behind inflation. And they can play out differently for distinct sectors. For instance, food inflation may sprout from different roots than inflation in the healthcare industry.

Myth 4: Recessions Always Follow Periods of Inflation.

Fact: Inflation can precede bull markets, not just possible downturns.

Over the last 40 years, we have had a couple of upticks in inflation similar to what we’re experiencing now. Those were in 1982 and 2009. Bull markets, not recessions, followed both of those periods.⁴

While some still predict a recession soon, others see this as a “transition” phase, pointing to continued job creation and spending as reasons to remain optimistic.⁵

More Strategies for Coping with Inflation Anxieties & Misconceptions

No one can flip a switch to instantly stop increasing prices, rising interest rates, and higher inflation. We also can’t predict what happens next with absolute certainty. However, we can arm ourselves with facts to make informed financial decisions. By focusing on long-term financial principles rather than short-term market fluctuations, we can navigate inflationary periods more effectively. Regular check-ins with skilled financial professionals can provide valuable perspective and help ensure your strategies remain aligned with your goals, regardless of economic conditions.

Sources:

1. https://www.imf.org/en/Publications/fandd/issues/2022/09/hall-of-mirrors-how-consumers-think-about-inflation-pizzinelli

2. https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Inflation

3. https://www.richmondfed.org/publications/research/econ_focus/2024/q1_q2_federal_reserve

4. https://www.fool.com/investing/2024/01/09/last-inflation-fell-fast-9-year-bull-market-stocks/

5. https://www.forbes.com/advisor/personal-finance/when-will-inflation-go-down/

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