Did you know that a movie ticket used to cost only $5?
In 2001, it was much cheaper to see a movie in a theater. In 2020, it cost over $9 — and that's not even including popcorn or drinks (also more expensive).
So what gives?
How did things get so expensive in your lifetime?
You can blame inflation for that!
Inflation happens when prices for the things you buy go up year after year.
Every year, people who study the economy keep track of how much it costs to buy necessary goods like groceries and gas, or pay for services like transportation.
They compare these prices to the prices of the same goods and services from the year before. Then they calculate the percentage prices rose from one year to the next.
So if a basket of groceries cost $100 last year, and the cost went up to $102 this year, the inflation rate is 2% (2 dollars is 2% of $100).
How Do I Calculate Prices After Inflation?
Imagine a future where you can buy luxury chocolate 🤑
It's the year 2030 and a chocolate bar costs $100,000. The inflation rate is 1% and the chocolate bar company wants to raise the price at the rate of inflation.
To figure out how much the bar will cost in 2031 after inflation:
Take the starting price — $100,000
Multiply it by 1.01
1.00 stands for 100% of the starting price
the added .01 stands for the 1% increase = 1,000
100,000 x 1.01 = 101,000
In 2031 the bar will cost $101,000!
You want to buy a pair of sneakers for $65. If you apply a 3% inflation rate to the price, how much will the sneakers cost if you buy them a year from now?
How Does Inflation Happen?
Too much demand for a product, not enough supply.
Demand means how many people want to buy a product.
Supply means how much of that product is available to buy in the market.
Example: 6000 people want to buy the latest VR game, but only 3000 downloads are available. The VR streaming service raises the price because gamers will pay more to get in on the action.
It costs more to make a product.
The materials to make a product cost more than they did before, and/or the workers who make the product get paid more than they did before.
Example: The game designers got a pay raise this year, and electricity rates went up, too! The company charges more to cover the extra costs.
Problems with shipping a product.
Accidents, natural disasters, or political problems cause delays in delivering the product to the market.
Example: A tropical storm leaves cargo ships stranded in China. Stores in the US only have a few VR headsets to sell, so they raise the price to make up for lost profits.
What Does Inflation Mean For You?
In the future, you won't be able to buy as much with a dollar as you can today.
Imagine you're saving up to buy a $399 gaming console for your birthday next year. The inflation rate is 2.9%. By the time your birthday comes around, the console will cost $410.57 if the price increases at the rate of inflation.
Your purchasing power — how much you can buy with your money — will be weaker.
If the rate of inflation stays at 2.9%, how much will the game cost in 2 years if you apply the inflation rate to the price?