Inflation Is Not Your Enemy: A CPA Reveals What You've Never Been Told

D. Rhodes, CPA, Writer and Editor

So, I'm sitting in my barber's chair last week, getting my cut, when one of the barbers in the shop says “Y'all see YouTube TV done went up to $83?” 

The shop owner, my barber, jumps in, “Yeah man. Everything's going up - it's inflation, right?”

He’s looking at me wanting me to vouch for him, since his guys know what I do. I had to tell him what I'm about to tell you:

Basing your prices on inflation (which is usually more referred to for consumer goods) is one of the biggest mistakes you could make for your business.

I'm going to explain what most don't realize about inflation - and it's costing them time and money.

Imagine being at a community swimming pool - this represents the economy.

The pool operator decides to add more water to the pool. Naturally, as more water flows in, the water level starts to rise. Everyone in the pool notices they have to adjust their position.

• Kids in the shallow end have to stand on their tiptoes 

• Adults in the middle of the pool find themselves floating higher 

• Swimmers in the deep end barely notice the change in the water levels, but what they do notice is that more people are coming to the deep end

This signifies that no matter what group you relate to everyone is affected.

As people adjust to the new water level, they create ripples. These ripples reach other swimmers. Those swimmers then move and create their own ripples. Soon, the entire pool is experiencing ripples happening all at once - turning small ripples into large waves. 

This cycle continues until either: 

• The pool operator stops adding water 

• Or opens the water drain 

  
  

Now, let's translate what this means for inflation, here's the terms you need to remember:

• The Pool = The Economy 

• Water = Money in circulation 

• Water Level = Price levels 

• Pool Operator = Federal Reserve 

• Adding Water = Adding money to the economy 

• Swimmers = Businesses and consumers 

• Shallow End Swimmers = Small businesses and consumers 

• Deep End Swimmers = Large corporations

• Ripples = Individual price changes

• Waves = Sum of price changes

Once again, think of the economy as a swimming pool, where the water represents money and the water level represents prices.

Let's see how inflation happens:

The Federal Reserve (pool operator) adds more water (money) to the pool.

• Just like turning on a hose, they add money by lowering interest rates and buying bonds

Now there's more water in the pool (money in the economy), but the pool size hasn't changed.

With more water in the same size pool, the water level must rise.

• Similarly, when you put more money in the economy but the amount of goods and services stay the same, then price levels rise 

Now everyone in the pool (businesses and consumers) has to adjust to the new water level.

• People in the shallow end (small businesses) have to raise their heads (prices) to stay above water 

• People in the deep end (large corporations) might barely notice the change, because their services or products are usually directly adjusted

Some people (businesses/industries) swims faster than others, which is why we see:

• Housing prices rising 7.1% 

• Food prices up 2.9% 

• Gas and energy prices actually decreasing

When swimmers move (businesses change prices), they create ripples.

• These ripples affect other swimmers (other businesses and consumers) 

• Everyone has to adjust to both the higher water level AND the ripples

  • A multitude of ripples eventually turn into waves 

• More adjustments create more waves 

• More waves lead to more adjustments 

This continues until the pool operator (Fed) either:  

• Drains some water (removes money from circulation) 

• Or stops adding water (tightens monetary policy)

  
  

The key point?

Just like a pool's water level affects everyone differently based on where they're standing, inflation affects parts of the economy differently based on their industry, positioning and ability to adjust.

Remember: Our ultimate goal is to help you save time and money, while building wealth and legacy.

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*This article provides general information, not individual tax advice. Tax situations vary; consult with a qualified tax professional, like myself, for advice specific to your circumstances.