Explaining inflation to your children is unavoidable. Talking to your child about money is often something we avoid but we are doing them a diservice. It has been the lead news story for a while and you may have also had conversations with and around your children about the cost of living. They may even have noticed it’s effect on their pocket money. One of the main roles of a parent, and rarely done well in schools, is making sure that our children are able to manage their finances when they leave home. Here we look at the basics of it, and then explain it using a Mars bar! Then we can link this to their pocket money.
Inflation: What Is It?
The simplest definition of inflation is an increase in prices. No matter if they are in the toy store or their favorite food, parents shouldn’t have any trouble finding examples to demonstrate the notion. A baseball bat that cost £50 two years ago may now cost £70. This would be the accessible way for you to explain inflation to your child.
The Consumer Price Index (CPI) is one of the most popular measures to monitor inflation. Every month, the CPI records the prices of various consumer goods, ranging from food and apparel to housing and healthcare, through surveys of thousands of businesses. Most national banks sets a goal inflation rate of 2%, but as of 2022, it is already at 8% across most parts of the world or higher.
Explaining to a Child Why Inflation Occurs?
Below is some examples of how you can explain inflation to your child using suitable examples. Firstly prices go up for a number of reasons:
Cost-Push Inflation – The cost of the Coke to the shop keeper has gone up. The petrol to drive it to the shop costs and extra 5p. Therefore he adds 5p to the cost of Coke to keep his profit the same.
Demand-Pull Inflation – When the demand for goods or services exceeds the supply, this occurs. The cafe has one can of Coke. Three people want it, so the owner keeps putting the price up to the point where only one person is willing to pay. The shop keeper is deciding the price by maximising profit.
Built-In Inflation – The workers in his shop also want to be paid enough to buy drinks. Therefore he has to put their salaries up. This means he has to charge more for his can of coke. This the 2% that countries see as the natural level that is healthy. This is why your child gets more pocket money than you did, but can only buy about the same as the cost of a can of Coke has also gone up.
How do you explain the cause of the record-breaking inflation today to your child? It is mostly the first. Due to Covid-19 and the war in Ukraine there is less resources and fuel. As a result they cost more for us all. These costs are past on to all of us. This results in the second, workers want more money to buy there petrol. We are now at the point where the two of these act together to keep increasing costs. Things cost more, so workers want more money, therefore things cost more.
So, why not just print more money? One solution a child may have is to just print more money. To this explain that a $100 note is only worth a basket of food as everyone trust it. If more money is printed, the shop keeper will not accept it as he will think that the next day there will be more notes. This is hyperinflation and so the basket of food will be $150 the next day as there will always be more notes. The money then become worthless.
Explaining Why Inflation Has the Effects It Has on Your Child
At the moment, the cost of things is rising more than salaries. Therefore, we are having to make decisions what we can and can’t buy. For your child this would be that if the can of Coke and a Mars bar both double in price they can only buy one of them with their pocket money rather than both. This is the same decision you may need to make about a holiday, or some people heating or eating. Whatever your own economic position, it is worth explaining that the effects are not equal for everyone.
So if the Cost of Everything Is Going Up, Why Are Interest Rates?
So your child might say if everything is difficult why are interest rate going up. Traditionally, to remove demand for spending money, governments make it worth saving it in a bank and stop borrowing more. So your child might save their money rather than buy that can of Coke if they thought that $1 would become $1.50 at the end of the year. It is an interesting discussion whether this will work this time. Lots of the things people are buying are things that they need so can’t avoid.
Explaining inflation to your child is relatively easy using the anology of their pocket money and a can of Coke. Depending on their maturity it can then be difficult to go further and explain the link with interest rates. But, as said at the top, one of the roles for us as parents is to make sure that our children understand these concepts. Conversations about money and choices are not something to be avoided. Like an understanding of diets and healthy relationships, if your child does not have an understanding before they leave home, we can’t be surprised if they make mistakes!