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The Inflation Threat is Real!

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GadgetsEvery day I pick up a newspaper, magazine, or turn on the news and a headline similar to this one flashes before me. Often it relates to the stock market, economic indicators or some other future event that no one can possibly predict with any degree of certainty. While the subject matter varies, the storyline remains the same: some really smart person argues with some other really smart person about .

One of the recent arguments between economists and analysts alike centers on inflation. With governments around the globe continuing to pile enormous amounts of debt onto their books, many folks believe countries like the US will have to inflate their way out of the massive liabilities. A growing minority, however, believe that a bigger risk looms ahead of us in the form of deflation. At the end of the day, the average American has no control over the eventual outcome of this debate and we are going to have to deal with it together either way. However, a more personal, predictable and equally serious threat to your financial well-being is a concept I am going to call lifestyle inflation, and it refers to the way additional goods and services seem to creep into our budgets over time.

Lifestyle inflation comes at us in a variety of ways, however, the primary cause is innovation. Venture capitalist and author, Guy Kawasaki, states that innovation is simply creating something that people do not know they need yet. The past decade has provided some of the most glaring examples of this phenomenon in history. The technological advances we have made are simply astounding! Many are designed to make our lives more efficient and connected, and for the most part, they really do. However, we have to remember that the ultimate goal of marketing departments is to convince consumers that they can not live without their product. In other words, they are attempting to subconsciously change wants into needs. And many are shockingly good at it!

One great example of the power of these marketing machines is Apple. Whether it is the iPod, iPad, iPhone, iTunes,  iWhatever, Apple has created an entire legion of folks that line-up for hours leading up to the release of a new product. They can’t even wait a day for the product…they need it now!

Another example is the outgrowth of the internet. I was introduced to the internet through AOL and a dial-up modem in the mid 1990’s. In 1999, I was introduced to high-speed internet. Prior to then, I thought the internet was a pretty cool thing, but as soon as I got my hands on high-speed service, the internet became my go-to source for everything. Today, I can’t imagine life without it. In fact, it comes with me wherever I go!

I bought my first cell phone in the year 2000. The thing weighed about a pound and I was lucky to get service in my own house. Today, my wife and I do not even have a land line in our home. We can travel almost anywhere on Earth and continually remain connected to the internet, watch movies and make phone calls from the same palm-sized device. Our society lives on these devices and would not be the same without them.

Unquestionably, innovation is a wonderful thing, however, it comes at a cost. Ten years ago, most households in the US did not have a single cell phone. Today, we do not even blink an eye at a $150/mo phone bill, on top of the monthly service fee for the land line we rarely use. Further, we buy a new phone every two years because we have to stay up on the latest technology.  Ten years ago, a good cable TV package carried about 50 low-def channels to choose from. We can not live today without our 50 inch TV’s beaming digital HD cable on 500 channels through our DVR boxes at another cool $150/mo.

As a society, we have effectively doubled or tripled what we call “needs” in our lives, but our incomes do not always appreciate at the same pace. Innovation is not going to go away. In fact, most people welcome it with open arms. As responsible consumers, however, we have to maintain a cushion in our household cash flow for this inevitable phenomenon. Further, for every new need that enters our life, perhaps we can find an old one we no longer want.

This article was originally published on the Financial Planning Association’s All Things Financial Planning Blog.


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