Inflation doesn’t hit like the sting of a credit card bill from an overzealous shopping trip. Rather, its bite is slow and painful.

Because the price level of goods and services tends to rise gradually, inflation’s slow incursion on your pocketbook is commonly described as ‘creeping up’ on you.

Good versus bad inflation

Inflation is most noticeable when it rises faster than your salary, since it means that your purchasing power declines. The inflation rate is based on the consumer price index (CPI) – the measure of price changes in a representative basket of consumer goods and services. Central banks work hard to maintain an inflation rate that increases in line with wages – a sign of a healthy economy. Therefore, any deviation from purchasing power equality is likely to be small.

Unconscious buying behavior

Nonetheless, even an inflation rate of 1% can cost you money if you don’t lower your spending or increase your income in line with the general price increases. As described in Harvard Business Review, 95% of buying behavior is subconscious. Although you may not notice a change in the overall price of your weekly groceries, you likely adjusted your behavior in response to a rise in inflation. If dairy product prices increase, you may switch yogurt brands or buy cheese on sale, without using mental accounting.

Price increases and the value of things

If your hairdresser raises the price of your monthly trim by NIS 50, you will likely notice. As irrational beings, people place more value on items that cost more, such as luxury goods, over a basic need such as food. If your hairdresser’s rent increases, he may pass the cost onto his customers, and increase the cost of a trim. With NIS 50 less to spend, you won’t be able to enjoy your favorite cafe hafuch (latté) at the coffee shop next door. Now you feel inflation!

For more on how spending patterns today determine how much money you have to save for retirement, click here.

Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.

Published November 13, 2017.

Read more articles