Where’s My $5 Sandwich? How We Deal with Inflation

Brad Tatar: Thanks for joining us today. I’m Brad Tatar, Senior Vice President with GreenUp Wealth Management. On this podcast, we’re going to talk about how we deal with inflation.

In theory, inflation isn’t that complicated. When supply is high or demand is low, there’s low inflation. When supply is low or demand is high, inflation is the result. The recent inflationary period started post-COVID for several reasons. First, supply was low because of the shutdown of the global economy, supply chain disruptions, and the Russian invasion of Ukraine. Pent up demand from COVID lockdowns and stimulus money increased demand.

We’re going to talk about why inflation feels bad, how we experience inflation, and what we can do about it. Along with me today is Aaron Kirsch, our Chief Client Advocacy Officer with GreenUp Wealth Management. Aaron, thanks for joining us today.

Aaron Kirsch: Thanks, Brad. Glad to be with you on this podcast. And we’re going to start off by talking about why inflation feels bad. The recent spike in inflation is really in sharp contrast to what we were used to. We’ve gone through about 40 years of low inflation. Certain things like technology are even decreasing in price. Think about computers or the internet, which is even free. But during COVID, some things like gasoline plummeted in price and then went up beyond pre-pandemic levels.

Brad Tatar: You know, Aaron, inflation can be stressful. Last year, an American Psychological Association poll found that 87 percent of respondents listed inflation as a significant source of stress in their lives. Inflation can cause uncertainty. It can cause financial stress for those with fewer financial resources. It creates anxiety.

Inflation can give us a feeling of a loss of control. Feeling powerless creates stress. Perceived control is necessary for our biological survival. If you don’t believe you can make choices that have a successful outcome, there would be no motivation to overcome challenges in life. All of this is compounded because it comes on the heels of similar stresses from the COVID 19 pandemic.

Aaron Kirsch: Those are great points, Brad. Let’s talk a little bit about how do we, as human beings, experience inflation. We experience inflation by the use of something called reference prices. There are two kinds of reference prices: internal and external.

An internal reference price is the price we’re used to considering as the normal price for any product or service. This is the price we have in our mind that we use to evaluate the prices that we encounter. We’ve formed our reference prices over decades of very low inflation. Think about Subway. Subway had their $5.00 foot-long specials, and those specials lasted from 2003 all the way through 2020. $5.00 became a really strong reference price for lunch. When prices start to increase, we’re suddenly in a state of confusion. We eventually adjust our reference prices for inflation, but that can take a while.

Brad Tatar: Aaron, when I think about adjusting reference prices for inflation over time- when I was a kid, gas was less than a dollar a gallon, and when I filled up my truck last week, it was almost $4.00 a gallon. But that was over the course of an extended period of time.

Aaron Kirsch: Right. And 20 years from now, Brad, you’ll think back and say, “Boy, I remember when gas was $4.00 a gallon.”

Brad Tatar: That’s right.

Aaron Kirsch: Okay, Brad, we’re starting to sound like our fathers when we look back at old prices, old reference prices. So that’s internal reference prices. Brad, let’s talk about external reference prices.

Brad Tatar: Sure, Aaron. That’s the price set by marketers who can manipulate prices for goods and services. And there’s a common theme these days around what’s considered or known as “shrinkflation.” It’s the same price for that sandwich, but now you get less sandwich. Or, you can put an expensive product next to a not-so-expensive one. For example, a $400 pair of shoes next to a $200 pair of shoes, making those $200 shoes seem not so expensive.

Or there are those options when you go for an oil change, for example. The good, better, or best options. Or you might see something on the rack that shows a regular price versus a sale price- all examples of external reference prices. So, when you come across a price provided by a marketer, you know that you’ve been influenced whether you wanted to or not.

Other influences would be things like dynamic pricing, algorithms, or flash sales- all things provided by marketers to make you feel better about the purchase. Ultimately, you have the power to decide if you really need the item, if you can afford it, or if you’re willing just to pay the price they’re offering it at.

Aaron Kirsch: That’s right, Brad. How many times have you been on Amazon and you see the price and then you come back a few minutes later and it’s different? That’s an example of algorithms changing dynamic pricing. And Disneyland and Disney World- they’re now having dynamic pricing where the price changes depending on demand. What time of day you’re going, or what time of the year you’re going can change the price of something. These are all external reference prices that are trying to manipulate you into making purchases and influencing how you see price.

Brad Tatar: Aaron, it drives me nuts too. I think everybody can attest- airfare might be a perfect example of dynamic pricing with algorithms.

Aaron Kirsch: Brad, we’ve talked about internal reference prices and external reference prices. Reference prices are based on specific items. They’re not based on everything we buy. For instance, we notice price fluctuations on items that we’ve bought recently and items that we buy frequently. For example, we’re more likely to notice a change in the price of coffee versus the price of toothpaste that we only buy maybe every six months or so.

And then, of course, there’s the price of gas. This is the most visible marker of inflation. Historically, gas plays an outsized role in how consumers see prices in the economy. There is no price in America better known than the price of a gallon of gasoline. So, when gas prices rise, it lowers consumer confidence. And as you mentioned, Brad, you just filled up your tank and you’re filling up your tank pretty regularly. You’re watching the price of gas all the time. And so is everyone we know.

Brad Tatar: Absolutely, Aaron.

Aaron Kirsch: Okay, Brad, we’ve talked about inflation being stressful, and we’ve talked about how we experience inflation. What can we do about the stress that comes with inflation? What can we do about this feeling of loss of control?

Brad Tatar: Well, Aaron, to start off with, we have to focus on what we can control. So, things that we can control, first and foremost, would be budgeting. Keep track of your expenses and your spending patterns. Knowing where your money is going can help you make informed decisions and identify areas you can cut back on or save. You can trim non-essential spending and have a better understanding of your wants versus your needs so that you can avoid impulse buying. Have a clear direction when making everyday decisions.

You can reduce debt.

Shop smarter: look for the discounts, the coupons, the sales, generic products over named brands.

Or negotiate a raise. The cost of living can increase. You can self-advocate at work and ask for a raise.

Aaron Kirsch: Those are all great action steps, Brad- budgeting, reducing your debt, shopping smarter, and negotiating a raise for yourself.

And related to that is saving money. There was this Swedish study that found that those who saved money each paycheck reported feeling less anxious and more secure in their financial situation because savings weakens our insecurities born from the uncertainty inherent to the future, and saving money helps people feel competent and capable as masters of their own financial fate. Ultimately, saving money increases the sense of possibility and hope. It gives somebody something to look forward to. It gives them some feeling of control.

Another thing related to saving money is creating an emergency fund. Brad, can you tell us a little bit about what an emergency fund is and what does it do?

Brad Tatar: Of course. An emergency fund is nothing more than savings set aside for unexpected expenses. As planners, we generally advise clients to have three to six months of living expenses set aside for an emergency fund. An emergency fund is a financial safety net, which provides peace of mind during financial uncertainty.

Aaron Kirsch: That’s right, Brad. And another thing we can do to focus on what we can control is to limit our exposure to media. We all know that media focuses on headlines that grab attention. They’re always giving us this sky is falling coverage, which can increase anxiety about inflation. So, we should just make sure that we don’t get caught up in the doom and gloom hype that is financial media and news in general.

Brad Tatar: Aaron, it doesn’t matter the time of day I turn on the news. It always seems like it’s breaking news.

Aaron Kirsch: That’s true. There’s been a study that found that the coverage of negative news to positive news is a ratio of 17 to 1. Because as humans we’re motivated to make sure that we’re safe. And so negative news is always more attention-grabbing than anything positive.

Brad Tatar: Wow, that’s alarming Aaron. Another big item that would allow you to focus on what you can control is financial planning. Your advisor factors in inflation into your plan, and obviously we know that a dollar today isn’t going to buy you a dollar worth of stuff in 10 or 20 years. So, we model that into a financial plan. A financial plan ultimately should give you a clear understanding of your financial situation. A good financial plan would allow you to focus your attention on your long-term goals. Setting financial goals and developing a plan for achieving them can give you confidence to manage your finances during economic changes. A good financial plan can also give you a sense of purpose and direction, which can help you stay motivated and less stress.

Aaron Kirsch: Right, Brad. Financial planning really gives you a sense of control because you’re taking control of your present and your future. Another thing you can take control of is your perceptions. We can’t control what happens in life, but we can control how we react to things that happen in our lives. And when we’re able to let go of situations that we know we can’t control, we’re just going to do better. We don’t actually need to be in control all the time. We just need to have a sense of control. Doing all these things that we just talked about budgeting, financial planning, saving money, ignoring the media hype- these are all things that we do have control over. While we can’t control inflation, we do have some sense of control in life.

Brad Tatar: If we put all this together, it’s really putting things into perspective.

Financial education and awareness: educate yourself about how inflation works and how it affects your finances. Understanding economic factors can help really break down the barriers around the situation and ultimately reduce anxiety.

Aaron Kirsch: Brad, another way to put things into perspective is just knowing that inflation is temporary. Economic cycles are just that, they’re cyclical. The Fed is working on controlling inflation right now by raising interest rates, and this isn’t the first time the Fed dealt with high inflation. The economy saw this back in the 1980s when inflation was much worse, at 14%.The Fed’s recent actions have brought inflation down from its peak last summer. So it’s working, slowly, but it is working.

It’s also good to know that wage growth is now outpacing inflation, and anyone who gets Social Security benefits got an over 8 percent raise this past year. This is driving consumer spending and making for a stronger-than-expected economy. Your buying power actually hasn’t decreased, even though inflation is up.

And finally, Brad, when we think about perspective, not everything is going up in price. If you’re lucky enough to have already owned a home or a car before this inflationary period, some of your most significant expenses like housing, they’re fixed. Or your car payments- those are fixed. So not everything has gone up in price.

Brad Tatar: Those are great points, Aaron. And something else to consider: Nothing good lasts forever, but nothing bad lasts forever either. It’s normal and even expected to feel stressed about inflation. However, there are things in life that we can control, and we can always use the context and knowledge to put inflation into perspective.

If you have any questions about how inflation influences your particular situation and your financial plan, please contact your GreenUp Wealth Advisor. And if there’s anyone in your life who you think would find value in listening to this podcast, please share it with them. For Aaron Kirsch and the entire team at GreenUp, I’m Brad Tatar. Thanks for listening.