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Last updated on April 10th, 2025 at 11:58 pm
Editor’s Note: This post was originally published in August 2022 and has been updated for improved clarity, updated insights, and relevance to our evolving mission.
The first question we should ask ourselves before diving into this post is, how often does inflation occur? The answer to this is quite frequently! Inflation is an essential part of a healthy economy. The Fed (Federal Reserve Board System) has a long-run annual inflation goal of 2%. We shouldn’t fear inflation in small amounts because it allows the Fed to intervene to stabilize the economy. But when there is too much or too little inflation, it can impact your wallet negatively and, more importantly, your overall wealth!
❓ Quick Gut Check: Have you noticed your everyday spending increase lately? Take 2 minutes and list 3 things that cost you more now than a year ago. That’s inflation at work.
Have you gone grocery shopping recently? Surely, you noticed that the eight items you purchase from the produce section now cost three times as much. Yep, that’s right, the ingredients to make your favorite veggie stew have gone from $10 to $30 over two years!!! Absurd right???
That’s the horror of what inflation can do in just a short period when it gets out of hand.
🧮 Action Step: Pull up your last grocery receipt and compare it to one from 12–24 months ago. What’s changed most? This helps you visualize how inflation is eroding your purchasing power.
How Does Inflation Occur?
There are tons of factors that drive inflation. I’ve enjoyed learning about all things that affect money (and still do), but I must say, this topic is both extensive and mind-numbing. I would be lying to you if I told you it was my favorite topic to learn in my macroeconomic studies. But I’m going to try to make this as enjoyable as I possibly can!
For the sake of simplicity and not boring you to the highest extent, we will discuss the leading players in inflation and how they impact inflation:
- Consumers
- Businesses
- Government
- The Fed (Federal Reserve Board or U.S. Central Bank)
🔍 Want to understand what’s really moving prices? Subscribe to Wealth Impact Journal to get simple breakdowns of inflation, interest rates, and investment strategies—delivered without the econ jargon.
Consumers
Consumers of goods and services would be you and I. We consume food, clothes, accessories, houses, entertainment, etc. Whenever money leaves our wallet to purchase something, it is to consume a good or service.
A shortage occurs when there is an insufficient supply of a good or service. This means there is not enough product available to meet the demand. As a result, prices rise until the market equilibrium is reached. If there is an excess supply, the good or service is more abundant than the demand. The cost of goods or services will fall into equilibrium.
The best example of this is gas prices! At the time of this post, the war between Ukraine and Russia is still ongoing. This war has been a major cause of gas prices soaring north of $5 a gallon in some parts of the U.S. It should be noted that 8% of U.S. gas imports were from Russia in 2021, according to the U.S. Energy Information Administration. Due to America not being a fan of how Russia has been treating its fellow neighbor (Ukraine) with the war, America put sanctions on Russia. Part of these sanctions banned gas import from Russia to the US.
As you could probably imagine, this put a strain on the gasoline supply for the U.S., while the demand for gas has remained consistent (since our lives in the U.S. resumed as usual). This lack of supply caused inflation in gas prices.
This is just one of many scenarios in which inflation occurs for consumers.
⛽ Feeling the pinch at the pump? Consider tracking your fuel spending this month and exploring alternatives like carpooling or adjusting travel. Small changes add up during inflation spikes.
Businesses
Businesses are the entities that sell consumers (you and I) goods and services. Inflation can impact them the same way consumers can, but on a much greater level! This can make or break a business and ultimately result in changing its operations or causing it to fail.
There are two primary types of goods a business can offer. Business goods can be elastic or inelastic. Depending on which type a business primarily provides, it could be challenging to survive inflation in labor (employee pay) or the cost of supplies (to make goods).
💡 Own a business or side hustle? Inflation doesn’t just hit consumers—review your pricing and supplier costs quarterly to stay ahead.
Elastic Goods
Firstly, an elastic good would be a good that loses consumer demand if prices increase. A hypothetical example would be a vanilla-scented candle made by Litty Lit, which is typically $2. Suddenly, the cost of vanilla scent has soared due to less supply. This would mean it’s more expensive for the business to create vanilla candles. The candle now costs the consumer $10…
This would be a ridiculous purchase for a reasonable person such as you and I (I’d hope lol). Demand would probably decline for this candle, with the price going up 5 times! Litty Lit will either need to discontinue the vanilla scent candle or continue producing it and potentially go out of business.
Inelastic Goods
Secondly, inelastic goods are essential, no matter how limited the supply is, and we will pay outrageous prices to obtain them. An example would be a gas company such as Shell or Exxon. No matter how high the gas price goes, they can pass the cost to you, and you will pay it, plain and simple. Depending on where you live, you’ll need gas to get to work, school, or even to buy groceries. These businesses know that and can charge accordingly! This is where electric cars and public transit win!
Government
The federal government has two ways to influence the economy: fiscal and monetary policy. The Fed (a separate branch of the government) controls monetary policy.
“Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty.”
International Monetary Fund
Government Stimulus
Do you remember that in 2020, after the onset of the pandemic, the government rolled out a $2.2 trillion stimulus package? OF COURSE, YOU DO! That’s when most of us received that hefty $1,200 deposit to our bank account.
Those stimulus checks were provided to the American people because unemployment in the country went nuts due to the pandemic restrictions. The most brutal hit was the service industry, bars in particular. Because bars couldn’t have customers, they weren’t making money, so that the employees couldn’t get paid. Employees then lost their jobs and couldn’t pay their bills, and the companies that collected their bills weren’t getting paid. A HUGE CYCLE OF MONEY LOST!
With that being said, the government had to support more than just the American people. They had to incentivize and compensate businesses to keep workers employed, facilitate new loans and grants to large and small businesses, increase aid to states, spend more on hospitals, offer targeted tax relief, and enact other tax and spending changes. See a breakdown of how the funds were used in the Committee for a Responsible Federal Budget article.
📊 Reflection Prompt: What did you do with your stimulus money in 2020? Spend it? Save it? Invest it? Use this as a moment to reflect on how unexpected cash flows affect your habits.
Effects of Government Stimulus
Of course, this was a lot of money for the government to dump into the economy at once. Although the stimulus was very much needed to keep the American people afloat, it put a lot of extra money into the economy. This contributed to inflation later down the line, as a portion of the population that received the stimulus money didn’t necessarily need it to make ends meet.
This left a whole bunch of money in the economy unspent and saved. When the pandemic restrictions loosened, consumers began spending money again. Consumers had a high demand for goods and services since they have been pent up at home for so long. Needless to say, supply is not there as businesses have not been operating as they should have for almost two years. This was a contributor to inflation going through the roof!!
The Fed (Federal Reserve Board or U.S. Central Bank)
“The U.S. central banking system—the Federal Reserve, or the Fed—is the most powerful economic institution in the United States, perhaps the world. Its core responsibilities include setting interest rates, managing the money supply, and regulating financial markets.”
Council on Foreign Relations
You see it, and I must agree! I fully believe the Fed is indeed the most powerful economic institution. They print the money of one of the world’s strongest currencies!!! The world’s weight is on their shoulders because other countries such as Panama, Hong Kong, Belize, and many more also peg their currency to the US Dollar for stability (so the foreign currency holds its value). So, although the primary responsibility is the US, more is at stake.
The Fed observes data such as unemployment, wages, and the consumer price index (the trend in the cost of goods) to make decisions to control interest rates. The Fed meets about eight times yearly or every six weeks to discuss the data. There are far too many variables to discuss them all, but knowing that the Fed influences interest rates is key.
Interest rates control the cost of borrowing to buy goods and for savers to save. This affects interest rates on business loans, mortgage rates, rates for car loans, and how much interest you accrue on your savings account.
When inflation is high, the Fed will hike interest rates to decrease prices and vice versa. The rule of thumb for this is that when interest rates go down, prices go up, and when interest rates go up, prices go down. This is how the Fed combats inflation.
📉 Next Step: Interest rates shape everything from your credit card APR to your mortgage payment. Bookmark the Fed’s next meeting date and watch how the markets react—it’s your real-time economics lab.
How to Fight Inflation
Inflation is an increase in the general price level of goods and services. If inflation continues at its current rate, then the purchasing power of money will decline. As a result, inflation makes it harder for consumers to buy things with their dollars.
Over the long term, there are several ways that you a consumer can protect your money from losing value. As we know, the annual target inflation rate for the Fed is 2%. With that in mind, we should invest our money for returns near or above 2% annually to maintain its value! The stock market and high-yield savings accounts are a perfect way to start!
🔄 From Rising Prices to Decentralized Solutions
While inflation continues to challenge everyday consumers, traditional tools like savings accounts and stocks aren’t the only options anymore. The rise of decentralized finance (DeFi) is creating new ways to protect your money, earn passive income, and access financial tools without intermediaries.
At WealthImpact Journal, we’re expanding our focus to include both TradFi and DeFi, so you can navigate this new financial landscape with clarity and confidence.
💡 In future posts, we’ll explore how stablecoins, lending protocols, and DeFi savings platforms might offer alternative ways to fight inflation—and grow wealth in a digital economy.
🎉 Launching Soon: The WealthImpact DeFi Series
Learn how to earn yield, manage risk, and build long-term wealth in the decentralized world.
👉 Join the waitlist or subscribe to our newsletter for early access!
