Understanding Inflation as an Employer

Most people who own or manage companies already understand what inflation is, but people often don’t know how to apply that knowledge to managing finances. Here’s a quick refresher on inflation for those who need it. Skip to the last section for an explanation of how it affects you and your team members.

What is inflation?

Inflation, in its most basic form, is the idea that the government adds money into the economy and that adding money dilutes the value of the dollar. 

An increase in inflation means there is more money circulating in the economy and each dollar is worth less than what a dollar used to be. This often causes prices to rise over time.  Products have the same value they always had, but the money you are paying with is worth less than it used to be. Thus, it takes more dollars to buy the same goods.

Why do we have inflation?

The US used to use the Gold Standard, meaning that for every dollar printed there was a dollar worth of gold in the federal reserve. The American economy basically worked like a debit card because all of the currency in circulation was backed by actual gold. This standard, however, was abandoned in the Great Depression.
Now, the country uses a Fiat Money system, which just means that the value of money is created by federal law. There isn’t any real commodity (like gold or silver) that dollars represent anymore. They’re now just paper, and it’s worth something because the government mandated it. 

What is inflation used for?

Contrary to popular belief, inflation is generally a good thing for the economy overall. The US actually aims to have an average annual inflation rate of 2.3% because it benefits the overall economy. By being able to add money to the economy, the government can help balance regular economic cycles. In a recession, inflation is often increased to help spur consumer spending and raise economic wellbeing. When the economy is doing well, the inflation rate is decreased to normal levels. One recent example of this is the pandemic. Inflation last year was about 6.2%. That's much higher than the US generally aims for, but it’s for good reason.  Think of how much money was added to the US economy by stimulus checks that the government provided, along with a variety of Covid Relief funding for schools and businesses. All of this money was added indirectly into the economy through consumers. This high inflation rate is what helped families get through hard times.

How does inflation affect your team?

While good for the economy, inflation can be bad for individuals. Not only does it raise prices for everyday goods and services, but it also affects savings accounts over time. Most companies offer some kind of retirement account to their employees, and those accounts are directly affected by national inflation rates. 

Do you know how much you and your employees make in interest on those savings accounts? If not, find out.

When the annual inflation rate is higher than that interest rate that those accounts earn, you and all of your staff are actually “losing” money because your savings are being devalued faster than they are being increased. This means that you want to find an account that averages 2.3% annual interest or higher because that's what the US attempts to average for inflation. Finding accounts that earn that much can be hard, though. Often this interest is supplemented through other savings methods such as long-term investment accounts or other methods of investing. Taking care of your team includes looking long-term and offering a retirement account that protects their savings.

All of this being said, Financially Fit does not partner with any specific institutions or banks, and thus we don’t endorse specific accounts to use. If you would like more specific information or have questions, you can feel free to reach out on our website. Our sales director and coaching director are both wonderful resources. We are happy to answer any questions you may have.

Here to help,
Your Financially Fit Team