HE-311
THE ECONOMY AND ME: INFLATION
by Jean W. Bauer, Family Resource Management Extension Specialist
Inflation is a worldwide problem. Everyone is affected. Inflation is an increase in the general price level of goods and services that continues over a long period of time. Many people want to help, but it's hard to know what can be done, and whether any action will make a difference.
Before we look at specific actions to help you, as a family member, let's look at the economy and your part in the economy.
Since inflation influences you in different ways, let's look at the roles you have in the economy. You are a (1) worker-earner, (2) consumer-spender, (3) investor-saver, and (4) taxpayer-citizen.
WORKER-EARNER
As a worker-earner you want to get the most income you can. In many cases the escalation clauses of contracts provide for wage increases as inflation increases; therefore, your total wage increases in relation to the rate of inflation. Escalation clauses, sometimes called cost-of-living clauses, are tied to increases in the Consumer Price Index (CPI). For example, the wage earner receives a 6 percent increase if the CPI has increased 6 percent over the past nine months. Each contract has different stipulations, but they are all stated in relation to the CPI. So, if you are covered by such a contract, your real income (gross income adjusted for inflation) is the same or possibly higher than a few years ago. But, if you are not covered by an escalation clause, you may have less real income now than you did a few years ago or even last year.
CONSUMER-SPENDER
As a consumer-spender you bear the brunt of inflation. As the price of goods and services increases with the rate of inflation, you, the consumer, pay more. Thus, the purchasing power of your dollar is decreased, and you have less for the same amount
of money. In other words, your REAL INCOME has decreased. Everyone is a consumer, and so everyone is affected.
The prices of goods and services, however, increase at differing rates. For instance, from 1978 to 1979 the prices of food items increased 10.8 percent while clothing prices increased 4.4 percent and medical costs increased 9.3 percent. The average price increase for all items purchased during the same time period was 11.3 percent.
The effect of inflation on you and your family will depend on the goods and services you purchase. For example, you may spend a larger percent of your income for food than your neighbor, so inflation would hurt you more because food prices are more inflated (10.8 percent) than are the average costs of goods and services prices (11.3 percent). Do you know how much you spend on the different goods and services?
INVESTOR-SAVER
The effects of inflation on you in the investor-saver role is somewhat harder to evaluate. Just as the rate of inflation on goods and services varies, the rate of return on investments also varies. You must weigh many factors before selecting the best investment for the amount of money available. These factors include the rate of return (interest, appreciation, yield, etc.) and the amount of risk for each type of investment.
The purpose of this bulletin is not to examine each kind of investment available to you nor to figure the return of the investment, but to make you aware that the effects of inflation for the investor-saver role may be different than for another role. A tool many people use to analyze investments is the "rule of 72. This tool helps you discover how many years it takes to double the investment at a given rate of return. To figure the number of years, divide 72 by the rate of
Cooperative Extension Work in Agriculture and Home Economics State of Indiana. Purdue University and U S Department of Agriculture Cooperating. H. G. Diesslin, Director, Lafayette, IN. Issued in furtherance of the Acts of May 8 and June 30, 1914. It is the policy of the Cooperative Extension Service of Purdue University that all persons shall have equal opportunity and access to its programs and facilities without regard to race, religion, color, sex or national origin.

• COOPERATIVE EXTENSION SERVICE • PURDUE UNIVERSITY • WEST LAFAYETTE, INDIANA •