Inflation is typically a hot-button political topic, but it is important to note that the ‘real’ rate of inflation is different for everybody.  The reason for this is because all products & services do not rise & fall in price equally, and people all purchase products and services in different proportions. Most people pay attention to the published consumer price index, which is based on a defined “basket” of goods and services.  This basket is intended to represent an “average” urban consumer, but is not necessarily representative of everybody.

Generally speaking, commodity products (Bricks & Sticks) such as oil, gold, food, and building materials tend to rise in price over time.  Generally speaking, monetary inflation impacts commodities first.  The reason for this is because commodities are purchased in large amounts with cash on a regular basis.  This means that as more cash moves through the economy, the first place it typically lands to drive up prices is commodities.  Over the long-term his price rise tends to be linear, unless a market bubble temporarily pushes prices up or crashes down prices.

Conversely, technology products (Bits & Bytes) such as computers, cell phones, televisions, smartphones, etc tend to decrease in price over time for a relative level of technological performance.  Another way this phenomenon manifests itself is when new technology products are introduced at the same price as the prior generation, but with more features or better performance.  In this case, the price per unit of performance is decreasing even though the total price may be staying the same.  The dramatic price declines of technology are a primary driver new business models that consistently emerge, based on new digital economics.  Consumers benefit greatly from the technology curve, since it allows them to consistently buy things that are better for the same amount of money or less.

The average level of market inflation is based on a presumed mix of commodity products that are increasing in price and technology products that are decreasing in price.  (This average is publicly reported through the Consumer Price Index, which has a fair number of its own quirks concerning how inflation is comprehended)  The way that this phenomenon translates into our life is that the level of inflation we personally experience depends on our pattern of consumption between commodity and technology products.  By and large, a person is more susceptible to inflation when the relative amount of commodity products they consume is higher.

In this way, inflation typically impacts people of lower incomes the most significantly.  The way that this happens is by inflating the cost of commodities such as housing, food and energy.  Since people of limited means typically spend a larger portion of their income on housing, food, and energy it means that they feel the effect of inflation much more sharply.  Conversely, people who spend a lower portion of their income on housing, food, and energy are less directly impacted by inflation since their personal basket of consumption is weighted more toward technology products that naturally deflate.

Since individual people don’t have the ability to affect market prices, it is not possible to change the level of market inflation.  However, since each of us has the power to choose how we consume products & services, we DO have the power to change the level of our personal inflation.  When oil prices increase, we have the ability to carpool, purchase a more fuel efficient car, move closer to work, or use public transportation.  Conversely, we can also choose to shift more of our purchase decisions toward products and services that benefit from advances in technology.  These types of changes are not always desirable, but they do give us power to influence the impact of inflation on our lives.

In this way there is a personal rate of inflation for both me and you that we can influence at the margins.  In the torrid journey of life, it is easy to become upset about inflationary government policies that push-up prices.  And in many cases, this anger is well founded.  However, it is not something that any of us have the power to directly change.  Each of us only have the power to change the decisions that we make as individuals.  In that way, the most important change to make is one that changes your personal situation and the situation of your family.