Three things we tend to get wrong about inflation:
1) Human nature makes inflation often seem worse than it is.
Example: When you buy a Snickers at a vending machine and the price has gone up from 50 cents to 60 cents, then you might say we have an inflation rate of 20%.
Because our minds are focused on high-frequency purchases, we tend to remember price increases but not price decreases. Our emotional conception generates a distorted view on the subject
2) Inflation isn’t the same for everyone.
Clarification: There is an idea that there is a single inflation number that impacts us all in the same manner. Yet, this isn’t totally correct. Inflation experienced by older people and those with lower incomes tends to be higher. The common denominator with these two groups is that they spend a higher percentage of their available income on health care, food, and housing. This gives them a disproportionate exposure to goods which are predominantly exposed to inflation. Yet, they consider that their entire consumption is subject to the same rate of inflation. On the opposite, young and rich people don’t experience inflation in the same manner as their spending habits are different. They are spending more on discretionary items. And even if they were to experience price increases, the consumer doesn’t react in the same way. Therefore, mathematically and psychologically, they are less exposed to it.
3) Inflation isn’t really about rising prices – that’s the outcome but not the cause.
Clarification: In a developed economy, labor costs represent about 70% of inflation, commodity prices account for about 15%, only, and the remaining 15% is due to a basket of smaller factors.
When a company sets prices for its goods or services, one question they ask is how much do they need to spend on labor to produce a given product. The inflation trap starts to work when salary payments increase and production output decreases.
Paying higher salaries isn’t necessarily inflationary because a company that pays higher salaries does so on the back of higher sales, which occurred because of improved effort provided by its workforce.