1 00:00:00,240 --> 00:00:04,080 Speaker 1: How do you make better choices when inflation starts to 2 00:00:04,120 --> 00:00:13,800 Speaker 1: buy it? Inflation, you see, doesn't just raise prices. It 3 00:00:13,840 --> 00:00:16,360 Speaker 1: also makes it harder to figure out what your best 4 00:00:16,480 --> 00:00:19,840 Speaker 1: choices are. It tricks people into staring at the bigger 5 00:00:19,920 --> 00:00:23,680 Speaker 1: dollar number instead of asking what those dollars can actually buy. 6 00:00:24,360 --> 00:00:27,720 Speaker 1: It blurs the signal. Was that one price jump you 7 00:00:27,760 --> 00:00:30,480 Speaker 1: just saw about something real? Or is the whole economy 8 00:00:30,640 --> 00:00:35,080 Speaker 1: just getting more expensive? And inflation, well, it leaves a 9 00:00:35,120 --> 00:00:38,040 Speaker 1: whole lot of folks reacting to it without a plan. 10 00:00:38,880 --> 00:00:42,440 Speaker 1: So think of today as a user's guide to living 11 00:00:42,479 --> 00:00:45,360 Speaker 1: with inflation. I'm going to give you one big idea, 12 00:00:45,880 --> 00:00:49,760 Speaker 1: one reason that inflation is so confusing, and then five 13 00:00:49,880 --> 00:00:54,280 Speaker 1: practical things you can do to protect yourself. Let's start 14 00:00:54,320 --> 00:00:59,200 Speaker 1: with the big idea. Economists use two very distinctive words 15 00:00:59,200 --> 00:01:03,120 Speaker 1: that they sound wonkey. The ideas are dead simple and 16 00:01:03,320 --> 00:01:07,840 Speaker 1: very important. A nominal number is just the dollar amount. 17 00:01:07,920 --> 00:01:11,160 Speaker 1: Nominal means name, it's the name on the price tag. 18 00:01:12,160 --> 00:01:16,199 Speaker 1: A real number is what that dollar can actually buy. 19 00:01:16,520 --> 00:01:20,680 Speaker 1: We call it real because it's the one that really matters. 20 00:01:21,080 --> 00:01:25,560 Speaker 1: And so when inflation arrives, that distinction becomes more important, 21 00:01:26,160 --> 00:01:30,840 Speaker 1: as does your focus on real rather than nominal variables. Hey, 22 00:01:31,280 --> 00:01:34,040 Speaker 1: here's a thought experiment. It's kind of wacky, but hopefully 23 00:01:34,040 --> 00:01:37,400 Speaker 1: it helps make the point. Imagine you wake up tomorrow 24 00:01:37,480 --> 00:01:41,480 Speaker 1: and every dollar figure in the economy has an extra 25 00:01:41,640 --> 00:01:44,919 Speaker 1: zero on the end. Your hourly wage goes from twenty 26 00:01:44,920 --> 00:01:48,760 Speaker 1: dollars to two hundred, Your rent goes from two thousand 27 00:01:49,160 --> 00:01:53,960 Speaker 1: to twenty thousand, your coffee goes from four bucks to forty. 28 00:01:54,240 --> 00:01:57,400 Speaker 1: Your savings account it goes from three thousand to thirty grand. 29 00:01:58,560 --> 00:02:05,440 Speaker 1: At first glance, this looks terrifying. Everything looks wildly more expensive. 30 00:02:05,840 --> 00:02:09,160 Speaker 1: But hang on, See in this economy, your wage is 31 00:02:09,200 --> 00:02:13,600 Speaker 1: ten times higher too, says everything else, And so all 32 00:02:13,760 --> 00:02:17,360 Speaker 1: we have is a whole lot more zeros. But nothing 33 00:02:17,760 --> 00:02:21,280 Speaker 1: real has changed. The trade offs that you face, the 34 00:02:21,360 --> 00:02:23,400 Speaker 1: number of hours that you need to work to be 35 00:02:23,440 --> 00:02:28,040 Speaker 1: able to afford, say a couple of beers, that hasn't changed, 36 00:02:28,600 --> 00:02:33,320 Speaker 1: And that is the difference between nominal and real. Nominal 37 00:02:33,639 --> 00:02:36,680 Speaker 1: is the number printed on the page. Real is what 38 00:02:36,800 --> 00:02:39,800 Speaker 1: that number can actually buy. One of them's dressed up 39 00:02:39,840 --> 00:02:43,880 Speaker 1: in dollar science, the others the one that matters. And 40 00:02:43,960 --> 00:02:46,680 Speaker 1: so in our thought experiment, there's a huge change in 41 00:02:46,760 --> 00:02:50,320 Speaker 1: nominal variables. But because your income has an extra zero, 42 00:02:50,639 --> 00:02:53,399 Speaker 1: as does the cost of everything, none of the real 43 00:02:53,520 --> 00:02:58,360 Speaker 1: variables have changed. Look, this distinction matters because it turns out, 44 00:02:58,400 --> 00:03:03,200 Speaker 1: of course you know that inflation feels awful. People see 45 00:03:03,240 --> 00:03:06,040 Speaker 1: the price rise first and then they feel the squeeze, 46 00:03:06,520 --> 00:03:08,640 Speaker 1: and if your income hasn't quite caught up yet, that 47 00:03:08,760 --> 00:03:12,400 Speaker 1: pain is absolutely real. So I'm not asking you to 48 00:03:12,520 --> 00:03:15,920 Speaker 1: ignore that. I'm asking you to take a second step. 49 00:03:16,280 --> 00:03:19,840 Speaker 1: Don't just ask did the number? Say the price go up? 50 00:03:20,280 --> 00:03:24,200 Speaker 1: Ask what happened to what I can buy? Because if 51 00:03:24,240 --> 00:03:27,960 Speaker 1: your wages, if they rise with inflation, then you've been 52 00:03:28,040 --> 00:03:32,160 Speaker 1: made whole. If the interest rate on your savings rises too, well, 53 00:03:32,160 --> 00:03:35,240 Speaker 1: that's going to help offset the damage. Now I get it. 54 00:03:35,640 --> 00:03:38,840 Speaker 1: Sometimes those offsets can be partial, and they take time. 55 00:03:39,280 --> 00:03:42,840 Speaker 1: Keeping track of them really does matter. Now, all this 56 00:03:42,880 --> 00:03:46,320 Speaker 1: works in reverse to a bigger paycheck, in fact, only 57 00:03:46,440 --> 00:03:50,640 Speaker 1: be worse off if prices rise even faster. A bigger 58 00:03:50,640 --> 00:03:53,440 Speaker 1: account balance can still mean you're going backwards if the 59 00:03:53,480 --> 00:03:57,720 Speaker 1: interest you earn is less than the amount that inflation took. 60 00:03:58,480 --> 00:04:01,240 Speaker 1: That's why when inflation hits, if you can't afford to 61 00:04:01,360 --> 00:04:04,800 Speaker 1: think only in dollar size, you've got to think in 62 00:04:04,920 --> 00:04:10,960 Speaker 1: purchasing power. Now there's a problem here, another problem. Bigger 63 00:04:11,040 --> 00:04:14,400 Speaker 1: dollar amounts can fool you. Economists have a name for 64 00:04:14,440 --> 00:04:18,080 Speaker 1: the mistake that people make here. We call it money illusion. 65 00:04:18,839 --> 00:04:21,839 Speaker 1: Money illusion is just when you focus on the dollar amount, 66 00:04:22,320 --> 00:04:24,080 Speaker 1: the number of dollars you have, or the number of 67 00:04:24,080 --> 00:04:26,239 Speaker 1: dollars you get, or the number of dollars something costs, 68 00:04:26,920 --> 00:04:30,680 Speaker 1: instead of what the dollars can buy. Mate. This is 69 00:04:30,800 --> 00:04:34,080 Speaker 1: one of the easiest mistakes to make in economics because 70 00:04:34,440 --> 00:04:36,880 Speaker 1: the big number, the nominal numbers right there in front 71 00:04:36,880 --> 00:04:39,719 Speaker 1: of your face. And almost all the big players in 72 00:04:39,720 --> 00:04:43,360 Speaker 1: the economy, your boss, the store, the bank, they talk 73 00:04:43,400 --> 00:04:47,160 Speaker 1: in terms of nominal prices, and they almost never focus 74 00:04:47,279 --> 00:04:51,239 Speaker 1: you on the real trade offs. That's your job. Hey, 75 00:04:51,720 --> 00:04:54,760 Speaker 1: let me make this personal. Last year, my boss, the 76 00:04:54,920 --> 00:04:58,839 Speaker 1: dean no less. She proudly announced to the faculty that 77 00:04:58,839 --> 00:05:00,839 Speaker 1: we're all going to get a two per pay rice. 78 00:05:01,480 --> 00:05:05,120 Speaker 1: She was smiling as she said it, except inflation was 79 00:05:05,200 --> 00:05:09,240 Speaker 1: running above two percent, so this wasn't good news. She 80 00:05:09,360 --> 00:05:13,200 Speaker 1: was offering a real wage cut. She's effectively saying, we're 81 00:05:13,200 --> 00:05:14,919 Speaker 1: going to pay you more dollars, but those dollars are 82 00:05:14,920 --> 00:05:18,480 Speaker 1: going to buy you less stuff, and the sneaky bit. 83 00:05:19,000 --> 00:05:22,160 Speaker 1: It's this because the number on the paycheck went up 84 00:05:22,200 --> 00:05:24,080 Speaker 1: by two percent. A lot of people, a lot of 85 00:05:24,120 --> 00:05:26,400 Speaker 1: my colleagues in the room, didn't quite register what had 86 00:05:26,480 --> 00:05:30,120 Speaker 1: just happened. Nobody stood up and said, hang on, you're 87 00:05:30,200 --> 00:05:34,520 Speaker 1: boasting about cutting our real wages and our ability to 88 00:05:34,560 --> 00:05:37,719 Speaker 1: buy stuff. I'll be honest, I didn't say to either. 89 00:05:37,760 --> 00:05:41,359 Speaker 1: I'm an economist. I ran the numbers later alone in 90 00:05:41,400 --> 00:05:46,440 Speaker 1: my office like a coward. That's money illusion. And the 91 00:05:46,560 --> 00:05:50,040 Speaker 1: point of this story is that even public policy professors 92 00:05:50,640 --> 00:05:53,640 Speaker 1: fall for it. You see the same thing with savings too. 93 00:05:53,880 --> 00:05:56,480 Speaker 1: Your bank starts paying you more interest. That feels reassuring. 94 00:05:56,560 --> 00:05:59,719 Speaker 1: Fair enough, If inflation's hiding the interest rate, you're purchasing 95 00:05:59,760 --> 00:06:03,440 Speaker 1: power is still leaking out the bottom. That's the way 96 00:06:03,760 --> 00:06:08,200 Speaker 1: inflation fools people. It confounds real changes in living standards 97 00:06:08,279 --> 00:06:13,640 Speaker 1: together with purely nominal changes in the size of the numbers. So, yes, 98 00:06:14,000 --> 00:06:17,839 Speaker 1: the pain people feel during inflation is real. But the 99 00:06:17,920 --> 00:06:20,600 Speaker 1: right way to measure that pain isn't by staring at 100 00:06:20,800 --> 00:06:23,240 Speaker 1: just at what happened to the sticker price. It's by 101 00:06:23,279 --> 00:06:27,440 Speaker 1: asking what happened to your real wage, your real savings 102 00:06:27,480 --> 00:06:31,400 Speaker 1: return and what your money can actually buy. That's the 103 00:06:31,440 --> 00:06:34,359 Speaker 1: mental shift I want you to make, and once you 104 00:06:34,480 --> 00:06:40,440 Speaker 1: make it, you're ready for the second problem. Inflation, you see, 105 00:06:40,760 --> 00:06:44,840 Speaker 1: makes the signals harder to read. It's like driving through fog. 106 00:06:45,560 --> 00:06:48,440 Speaker 1: The road's still there, the destination still there, the car 107 00:06:48,520 --> 00:06:52,080 Speaker 1: still works, but the signals are harder to read. That's 108 00:06:52,080 --> 00:06:55,200 Speaker 1: what inflation does. You see one price at the store jump, 109 00:06:55,960 --> 00:06:59,000 Speaker 1: What are you supposed to conclude? Is this thing now 110 00:06:59,040 --> 00:07:03,279 Speaker 1: genuinely scarce, demand searched, did the sellers cost for making 111 00:07:03,279 --> 00:07:05,880 Speaker 1: that one thing rise? Or is this just the general 112 00:07:05,920 --> 00:07:10,680 Speaker 1: fog of inflation drifting across the whole economy. That matters 113 00:07:11,200 --> 00:07:16,400 Speaker 1: because prices are supposed to help us make decisions. There's signals, 114 00:07:16,400 --> 00:07:21,520 Speaker 1: there's signals about opportunity costs, but inflation makes those signals fuzzier, 115 00:07:22,280 --> 00:07:27,080 Speaker 1: and the fog gets worse when inflation itself is jumpy. Hey, 116 00:07:27,280 --> 00:07:29,640 Speaker 1: let me show you. I'm going to jump into Stata 117 00:07:29,680 --> 00:07:32,640 Speaker 1: for a second, because this is exactly the sort of 118 00:07:32,680 --> 00:07:34,640 Speaker 1: thing where a little bit of data can make the 119 00:07:34,680 --> 00:07:38,640 Speaker 1: point much more easily than a thousand words of punditry. 120 00:07:39,840 --> 00:07:44,000 Speaker 1: I'm pulling headline inflation here straight from Fred and I 121 00:07:44,080 --> 00:07:46,560 Speaker 1: want to know two things about each of the last 122 00:07:46,560 --> 00:07:49,280 Speaker 1: few decades. First, for each decade, I want to know 123 00:07:49,360 --> 00:07:52,920 Speaker 1: what was the average inflation rate, and second, how much 124 00:07:52,960 --> 00:07:56,840 Speaker 1: did inflation bounce around within that decade. I'm going to 125 00:07:56,880 --> 00:07:59,920 Speaker 1: use the standard deviation to measure that, and the pattern 126 00:08:00,240 --> 00:08:03,040 Speaker 1: it's really clear. The fifties and the sixties we had 127 00:08:03,120 --> 00:08:06,440 Speaker 1: low and stable inflation, and then in the seventies and 128 00:08:06,480 --> 00:08:08,680 Speaker 1: eighties we've got high inflation, and you know what came 129 00:08:08,720 --> 00:08:12,920 Speaker 1: with it, It became a lot less stable, and then 130 00:08:12,960 --> 00:08:15,080 Speaker 1: over time we got better monetary policy, and over the 131 00:08:15,120 --> 00:08:18,200 Speaker 1: past few decades we're back to lower and more stable 132 00:08:18,360 --> 00:08:22,200 Speaker 1: inflation again. But whether that sticks with us, there's still 133 00:08:22,240 --> 00:08:25,880 Speaker 1: something of a question. So what you see from this 134 00:08:26,160 --> 00:08:28,720 Speaker 1: is that the high inflation decades that were also the 135 00:08:28,760 --> 00:08:32,840 Speaker 1: wobbly decades. And that's a big deal because when inflation 136 00:08:33,040 --> 00:08:35,760 Speaker 1: is low and steady, folks like you, whether you're at 137 00:08:35,800 --> 00:08:38,360 Speaker 1: home or at work, you could mostly just get on 138 00:08:38,440 --> 00:08:41,440 Speaker 1: with your life. You can mostly just ignore inflation when 139 00:08:41,480 --> 00:08:44,920 Speaker 1: it's lower, because even if your decisions are not exactly right, 140 00:08:45,280 --> 00:08:48,160 Speaker 1: they're going to be roughly right, and often that's good enough. 141 00:08:48,360 --> 00:08:51,040 Speaker 1: And when inflation's stable, you know, most of what's coming, 142 00:08:51,080 --> 00:08:53,600 Speaker 1: so you can plan it around it anyway. But when 143 00:08:53,600 --> 00:08:56,640 Speaker 1: inflation's high, it also tends to jump around a lot, 144 00:08:57,000 --> 00:09:00,679 Speaker 1: and then you've got to pay attention. That's because when 145 00:09:00,720 --> 00:09:03,559 Speaker 1: you've got high inflation, the gap between a smart choice 146 00:09:03,600 --> 00:09:06,439 Speaker 1: and a sloppy one gets a whole lot bigger. You're 147 00:09:06,440 --> 00:09:08,880 Speaker 1: going to have to compare prices a whole lot more carefully. 148 00:09:09,080 --> 00:09:11,000 Speaker 1: You've got to think harder about whether your pay is 149 00:09:11,080 --> 00:09:13,920 Speaker 1: keeping up. You've got to stop leaving fixed dollar amounts 150 00:09:13,960 --> 00:09:17,200 Speaker 1: sitting there while the world moves on around them. That's 151 00:09:17,200 --> 00:09:20,000 Speaker 1: what I mean when I say that an economy with 152 00:09:20,120 --> 00:09:23,280 Speaker 1: inflation it's like driving through fog. I want to make 153 00:09:23,320 --> 00:09:26,840 Speaker 1: one more practical point. The official inflation rate, the one 154 00:09:26,880 --> 00:09:29,600 Speaker 1: you hear about on the news, that's an average. It's 155 00:09:29,600 --> 00:09:31,559 Speaker 1: an average for the average cost of living for a 156 00:09:31,600 --> 00:09:35,920 Speaker 1: typical American. But you your life's not average. If most 157 00:09:35,960 --> 00:09:39,079 Speaker 1: of your budget goes on rent or gas and childcare 158 00:09:39,160 --> 00:09:42,800 Speaker 1: and medical bills, your personal inflation experience may end up 159 00:09:42,800 --> 00:09:46,760 Speaker 1: looking quite different than the official number. And that matters, 160 00:09:46,840 --> 00:09:49,920 Speaker 1: because the point of paying attention to inflation. It's not 161 00:09:49,920 --> 00:09:53,040 Speaker 1: to want an economics trivia quiz. It's to make better 162 00:09:53,120 --> 00:09:57,120 Speaker 1: decisions for you and your family. So use their headline 163 00:09:57,160 --> 00:09:59,880 Speaker 1: inflation number as a warning light, but then go back 164 00:10:00,080 --> 00:10:02,520 Speaker 1: look at your own budget as well. Where are you 165 00:10:02,640 --> 00:10:04,880 Speaker 1: getting hit? That's going to be the question. It's going 166 00:10:04,920 --> 00:10:08,320 Speaker 1: to lead you to better actions. I deeply want you 167 00:10:08,360 --> 00:10:12,040 Speaker 1: to succeed even during periods of high inflation. So here's 168 00:10:12,120 --> 00:10:14,800 Speaker 1: five pieces of advice that I think you ought to 169 00:10:15,080 --> 00:10:19,400 Speaker 1: think about following. First, stop thinking in dollar signs alone. 170 00:10:19,880 --> 00:10:22,319 Speaker 1: If your wages go up, ask whether they went up 171 00:10:22,360 --> 00:10:27,680 Speaker 1: more or less than prices. If your savings accounts starts 172 00:10:27,679 --> 00:10:30,600 Speaker 1: paying you more interest, ask whether that higher interest rate 173 00:10:30,720 --> 00:10:34,360 Speaker 1: is above or below the inflation rate. If something costs 174 00:10:34,400 --> 00:10:37,319 Speaker 1: more than it used to, ask whether it's actually become 175 00:10:37,400 --> 00:10:41,280 Speaker 1: less affordable relative to what's happened to your income. Look, 176 00:10:41,320 --> 00:10:43,560 Speaker 1: all of this sounds obvious once you say it out loud, 177 00:10:44,120 --> 00:10:46,880 Speaker 1: but it really changes the decisions you make. If you 178 00:10:46,920 --> 00:10:50,040 Speaker 1: were to make the mistake of seeing a nomenal pay 179 00:10:50,120 --> 00:10:53,240 Speaker 1: rise and really reacting to it, even if it's not 180 00:10:53,280 --> 00:10:56,360 Speaker 1: a real pay rise, you might loosen your household budget, 181 00:10:56,440 --> 00:10:59,559 Speaker 1: start spending a whole lot more and more freely save less. 182 00:11:00,080 --> 00:11:02,439 Speaker 1: Discover later on that your groceries and your rent and 183 00:11:02,480 --> 00:11:04,959 Speaker 1: your mortgage and everything else rose fast and you're paid it, 184 00:11:05,720 --> 00:11:07,000 Speaker 1: and then it's going to be really hard for you 185 00:11:07,040 --> 00:11:10,160 Speaker 1: to make ends meat. So the first move I want 186 00:11:10,160 --> 00:11:14,880 Speaker 1: you to make is mental, but it has really practical consequences. 187 00:11:15,160 --> 00:11:21,719 Speaker 1: That first move, translate everything into real terms before you act. Second, 188 00:11:22,120 --> 00:11:25,959 Speaker 1: find ways to build inflation into the contracts that govern 189 00:11:26,080 --> 00:11:29,800 Speaker 1: your life. Fun story years ago I made of mine 190 00:11:29,840 --> 00:11:32,079 Speaker 1: was negotiating a pay deal. He was earning one hundred 191 00:11:32,120 --> 00:11:35,120 Speaker 1: grand a year. Boss offered him a contract that would 192 00:11:35,160 --> 00:11:38,320 Speaker 1: raise his pay by five percent over five years. He 193 00:11:38,400 --> 00:11:40,200 Speaker 1: was chaffed. He was excited to get a pay rise, 194 00:11:40,440 --> 00:11:42,440 Speaker 1: but I pointed out to him that inflation was running 195 00:11:42,440 --> 00:11:44,760 Speaker 1: around about two percent a year, so over five years, 196 00:11:44,760 --> 00:11:47,240 Speaker 1: the price level would actually rise by about ten percent. 197 00:11:48,160 --> 00:11:50,400 Speaker 1: So let's look at the same offer and real terms, 198 00:11:50,440 --> 00:11:54,240 Speaker 1: his pay rises five percent, the price level rises ten percent, 199 00:11:55,320 --> 00:11:56,760 Speaker 1: and so he learns that at the end of the 200 00:11:56,800 --> 00:11:59,319 Speaker 1: day's boss was actually offer him a new contract that 201 00:11:59,360 --> 00:12:02,760 Speaker 1: would buy him less, not more. It was a real 202 00:12:02,840 --> 00:12:06,680 Speaker 1: pay cut for him. That was an AHA moment. The 203 00:12:06,760 --> 00:12:09,720 Speaker 1: offer looked generous in nominal terms because the number on 204 00:12:09,760 --> 00:12:13,240 Speaker 1: the paycheck got bigger, but once he shifted his reference point. 205 00:12:13,640 --> 00:12:16,560 Speaker 1: Once he stopped asking is my salary bigger? And started 206 00:12:16,600 --> 00:12:21,640 Speaker 1: asking will my purchasing power be preserved? The whole negotiation changed. 207 00:12:22,360 --> 00:12:25,000 Speaker 1: That's what I mean when I say, make your real 208 00:12:25,080 --> 00:12:29,920 Speaker 1: wage the reference point in any negotiation. You start the 209 00:12:29,960 --> 00:12:33,560 Speaker 1: conversation here, walk in. Tell you boss, say first I 210 00:12:33,679 --> 00:12:37,080 Speaker 1: need to be made whole for inflation, and then we 211 00:12:37,120 --> 00:12:39,600 Speaker 1: can talk about whether I deserve an actual raise on 212 00:12:39,640 --> 00:12:43,640 Speaker 1: top of that. That's a much stronger place to negotiate from, 213 00:12:44,240 --> 00:12:48,319 Speaker 1: and where you can build that logic into the contract itself, 214 00:12:48,840 --> 00:12:53,079 Speaker 1: building cost of living adjustments or indexation clauses or escalator rules, 215 00:12:54,000 --> 00:12:57,520 Speaker 1: all those words. Honestly, they sound so dull. They might 216 00:12:57,520 --> 00:12:59,959 Speaker 1: be the dullest words I've ever spoken. But they also 217 00:13:00,160 --> 00:13:02,800 Speaker 1: might save you thousands of dollars over the course of 218 00:13:02,800 --> 00:13:05,640 Speaker 1: a contract. For sure they did for my mate. And 219 00:13:05,679 --> 00:13:08,760 Speaker 1: so this advice that applies to more than just wages. 220 00:13:09,320 --> 00:13:11,400 Speaker 1: If you work for freelance rates, or if you pay 221 00:13:11,480 --> 00:13:14,480 Speaker 1: child support, or if you demand child support, or if 222 00:13:14,520 --> 00:13:17,440 Speaker 1: your company is involved in long term service contracts, or 223 00:13:17,520 --> 00:13:20,400 Speaker 1: any arrangement at all where a fixed dollar amount could 224 00:13:20,440 --> 00:13:23,480 Speaker 1: quietly shift in real value over time, then this is 225 00:13:23,520 --> 00:13:27,240 Speaker 1: a tool that you want to use. Third, I want 226 00:13:27,240 --> 00:13:30,640 Speaker 1: you to shop around more and substitute more aggressively during 227 00:13:30,720 --> 00:13:36,600 Speaker 1: times of higher inflation. Here's why. You see, when inflation's low, 228 00:13:36,800 --> 00:13:40,439 Speaker 1: price differences across stores and brands. They don't move around 229 00:13:40,520 --> 00:13:44,160 Speaker 1: all that much, and they don't move fast. So living 230 00:13:44,200 --> 00:13:48,120 Speaker 1: a financial life on autopil it's mostly fine. It's only 231 00:13:48,120 --> 00:13:50,800 Speaker 1: what inflation is higher, and especially when it gets to 232 00:13:50,840 --> 00:13:54,720 Speaker 1: be uneven, the prices start to adjust in different times 233 00:13:54,760 --> 00:13:58,200 Speaker 1: at different places. One seller reprices this week and the 234 00:13:58,240 --> 00:14:03,960 Speaker 1: next reprice is next month. One brand jumps, another doesn't. 235 00:14:04,000 --> 00:14:07,320 Speaker 1: One supermarket passes cost through quickly, another drags its feet. 236 00:14:07,800 --> 00:14:10,959 Speaker 1: All of that chaos means that there's a far greater 237 00:14:11,040 --> 00:14:16,000 Speaker 1: payoff to paying attention. So this is the moment. Compare supermarkets, 238 00:14:16,040 --> 00:14:19,240 Speaker 1: Compare insurance. Have another look at your different cell phone 239 00:14:19,240 --> 00:14:21,880 Speaker 1: plans and your different options. Compared the usual brand with 240 00:14:22,000 --> 00:14:24,920 Speaker 1: the generic. Compare the chicken with the pork or the beef. 241 00:14:25,360 --> 00:14:28,400 Speaker 1: Compare one cell who updated prices last week with another 242 00:14:28,800 --> 00:14:33,320 Speaker 1: who hasn't caught up yet. Periods of inflation have always 243 00:14:33,360 --> 00:14:38,200 Speaker 1: been periods where shopping around pays off more than usual. Fourth, 244 00:14:38,880 --> 00:14:42,360 Speaker 1: I want you to hold less idle cash. I'm not 245 00:14:42,400 --> 00:14:44,520 Speaker 1: telling you to get rid of cash altogether. You need it. 246 00:14:44,520 --> 00:14:48,360 Speaker 1: It's convenient. You can pay bills, buy ice creams, pay 247 00:14:48,400 --> 00:14:51,600 Speaker 1: for emergencies. Look, I'm a dad, I get it. But 248 00:14:51,640 --> 00:14:55,040 Speaker 1: when inflation's high, interest rates are usually higher too, And 249 00:14:55,120 --> 00:14:59,240 Speaker 1: that means that the opportunity cost of holding cash rather 250 00:14:59,240 --> 00:15:02,120 Speaker 1: than having that money savings account is a whole lot higher. 251 00:15:02,920 --> 00:15:05,880 Speaker 1: Every dollar that's sitting idle in your wallet, or sitting 252 00:15:05,880 --> 00:15:08,880 Speaker 1: in an account paying next to no interest, that's a 253 00:15:08,920 --> 00:15:12,280 Speaker 1: dollar losing purchasing power fasted, and that needs to so 254 00:15:12,440 --> 00:15:16,640 Speaker 1: take action. Keep less cash sitting around doing nothing, Move 255 00:15:16,720 --> 00:15:19,040 Speaker 1: more of it into those places where at least it 256 00:15:19,080 --> 00:15:22,760 Speaker 1: has a chance of keeping up. Use the savings account 257 00:15:22,800 --> 00:15:25,600 Speaker 1: that actually pays interest with the excess cash out of 258 00:15:25,640 --> 00:15:28,800 Speaker 1: your checking account. If you can, don't leave money falling 259 00:15:28,800 --> 00:15:33,440 Speaker 1: asleep when inflation's awake. Fifth, I want you to find 260 00:15:33,640 --> 00:15:37,240 Speaker 1: clever ways to head your inflation risk when it's available. 261 00:15:38,200 --> 00:15:40,000 Speaker 1: To be clear, I'm not going to go all finance 262 00:15:40,040 --> 00:15:43,600 Speaker 1: bro on you here. The goal isn't to gamble. The 263 00:15:43,680 --> 00:15:48,320 Speaker 1: goal is to preserve your purchasing power without too much work. 264 00:15:48,600 --> 00:15:51,000 Speaker 1: What you want is to find those tools that are 265 00:15:51,000 --> 00:15:56,920 Speaker 1: actually designed specifically to protect you against inflation. The clearest 266 00:15:56,920 --> 00:16:01,000 Speaker 1: example is what we call inflation indexed bonds, government bonds, 267 00:16:01,040 --> 00:16:05,160 Speaker 1: where the interest rate the government pays you rise with inflation. 268 00:16:06,000 --> 00:16:09,120 Speaker 1: In the United States, we have something called Treasury inflation 269 00:16:09,320 --> 00:16:12,680 Speaker 1: protected securities. They're called tips for short, or you can 270 00:16:12,680 --> 00:16:16,440 Speaker 1: get inflation linked savings products like eyebonds. There are similar 271 00:16:16,440 --> 00:16:19,040 Speaker 1: products in other countries, they just have different proper nouns 272 00:16:19,080 --> 00:16:21,960 Speaker 1: that go with them. Beyond inflation indexed bonds, the broader 273 00:16:21,960 --> 00:16:24,840 Speaker 1: principle is to avoid leaving much of your wealth in 274 00:16:24,920 --> 00:16:28,320 Speaker 1: those forms that are fixed in nominal dollars while prices 275 00:16:28,320 --> 00:16:31,080 Speaker 1: a rising cash is the obvious example of what you 276 00:16:31,120 --> 00:16:34,240 Speaker 1: want to avoid, but so's a checking account that pays 277 00:16:34,320 --> 00:16:38,480 Speaker 1: next to nothing, or your Venmo account or maybe even PayPal. 278 00:16:39,000 --> 00:16:41,600 Speaker 1: Share prices tend to rise with inflation, as does the 279 00:16:41,640 --> 00:16:45,480 Speaker 1: interest rate that banks pay on savings. Look, I'm not 280 00:16:45,480 --> 00:16:47,800 Speaker 1: trying to tell you there's a magic inflation trade that 281 00:16:47,800 --> 00:16:49,760 Speaker 1: I want you to go out and chase. Lifes too 282 00:16:49,840 --> 00:16:52,320 Speaker 1: short for all of that. The point is to make sure, though, 283 00:16:52,360 --> 00:16:54,640 Speaker 1: that your financial life is not built on a set 284 00:16:54,680 --> 00:16:58,680 Speaker 1: of claims that stay fixed even as the price level 285 00:16:58,880 --> 00:17:03,360 Speaker 1: rises and the value of those dollars shrinks. That's the 286 00:17:03,400 --> 00:17:08,560 Speaker 1: practical lesson. Okay, what about the deeper lesson here? The 287 00:17:08,600 --> 00:17:12,480 Speaker 1: broader takeaway here is inflation reminds you, I think of 288 00:17:12,520 --> 00:17:16,399 Speaker 1: something even deeper that pervades all of economic life. The 289 00:17:16,480 --> 00:17:18,560 Speaker 1: number that's in front of you, the number itself, it's 290 00:17:18,600 --> 00:17:22,040 Speaker 1: often the least interesting thing going on. What matters far 291 00:17:22,160 --> 00:17:28,760 Speaker 1: more is what the number means. So good economics involves 292 00:17:28,800 --> 00:17:33,000 Speaker 1: the habit of always asking the second question, what does 293 00:17:33,080 --> 00:17:37,440 Speaker 1: this number really mean? A nomenal price, well, that tells 294 00:17:37,480 --> 00:17:39,200 Speaker 1: you how many dollar bills go out of your pocket. 295 00:17:39,280 --> 00:17:42,439 Speaker 1: But what it really means in opportunity cost terms is 296 00:17:42,480 --> 00:17:46,679 Speaker 1: measured in real terms. And look, this habit of asking 297 00:17:46,760 --> 00:17:48,960 Speaker 1: what does it really mean? It's much bigger than inflation. 298 00:17:49,880 --> 00:17:51,920 Speaker 1: It matters for every part of your life. It's how 299 00:17:51,960 --> 00:17:56,119 Speaker 1: you avoid being fooled by flashing numbers, by political spin, 300 00:17:56,320 --> 00:18:00,720 Speaker 1: by dodgy comparisons and charlatans. It's how you keep bearings 301 00:18:01,280 --> 00:18:05,679 Speaker 1: when the measuring stick itself starts moving. And that lesson 302 00:18:06,320 --> 00:18:09,800 Speaker 1: that is the real user's guide to living with inflation.