How do we explain to children what inflation is? - part 1

Especially in the moments when we are facing a higher than normal inflation, it is inevitable that the little ones will not hear about this phenomenon and will become curious. In addition, the phenomenon is always presented in an unfavorable light, and therefore there is a risk that the little ones will be scared.

In this article, we show you how to explain inflation to children so that they understand, without being scared, and we present other concepts and measures to use to better understand the phenomenon and to avoid, as much as possible, its effects.

What is inflation, in short?

Inflation occurs when all the prices of goods and services rise, which leads to a decrease in the value of money, also called purchasing power. In other words, inflation comes when you can buy fewer things for the same money.

The phenomenon has, in particular, three causes:

Increased demand — When demand grows much faster than supply, sellers increase prices, which leads to a decrease in the purchasing power of money.

Rising costs — As production costs for some products or services increase, so do their prices, which again leads to a decrease in the purchasing power of money.

Monetary growth — When there is too much money in circulation, disproportionate to economic growth, its value decreases.

How do you explain to a child what inflation is?

As with any other financial concept, you need to explain to the child what he or she understands and use examples that he or she knows and understands. For example, you can refer to the prices of the things you buy or use constantly — notebooks, sweets, going to the barbershop, etc. In vain do you tell him about energy prices or even about interest and loans?

At the same time, it relates the concept to other financial concepts that it knows — goods, services, what is money, etc. To make sure he understands, ask him questions. For example, “Remember the notebooks I picked up at the beginning of last school year?” and continue the explanation there, step by step.

It’s also very important to do everything visually — don’t explain to him for half an hour about inflation and interest rates and hope he understands. Instead, go to the store, look on the internet, or show them graphic examples such as the table with the average basket of goods below that I made so that any child could understand.

One last piece of advice, which applies to all phenomena and financial lessons — do not present them in a “good” or “bad” light, but present them neutrally as a scientific phenomenon that we cannot control but for which we can prepare as much as possible. better with the right knowledge and resources.

Inflation rate

In any market economy, prices will rise or fall. Inflation occurs when there is a general increase in most prices. The percentage increase in prices, calculated for a month or a year, is called the inflation rate, which is calculated using the CPI, the Consumer Price Index.

If you want to explain to children how to calculate inflation, look together at the average basket of goods and services, which includes almost everything that goes into a regular household in a period (a month or a year) — food, utilities, clothes, household products, car services, hairdresser and everything else is essential for you.

As you can see in the example below, the average basket takes into account the number of products used over that period, the standard price for a month, and then the evolution of the price in each subsequent year. When specialists calculate the rate of inflation, they also add different weights to each product, depending on its importance to the household — if, for example, a family uses the car heavily, car and fuel costs will be heavier in the final calculation. of the index. Thus, the family will feel a slightly different rate of inflation.

Types of Inflation

There are several types, depending on the rate of inflation and the effects they have on a country’s economy.

Slow inflation — The easiest form of inflation, occurs when prices rise by a maximum of 3% per year. This rate is even beneficial for the economy, stimulating demand which ultimately leads to economic expansion.

Moderate inflation — This occurs when the inflation rate is between 3 and 10% per year and is harmful to the economy.

Galloping inflation — When the inflation rate exceeds 10%, the effects on the economy are very serious, it becomes extremely unstable and the purchasing power of money decreases very quickly.

Hyperinflation — Hyperinflation occurs when prices rise by more than 50% every month, which happened in Romania in 1997, with a rate of 256%.

Stagflation — This phenomenon occurs when economic growth stagnates but prices continue to rise. Although quite rare, it can occur due to energy crises, globalization, or other reasons.

Deflation — The opposite of inflation, deflation occurs when prices fall and, unlike inflation, is more difficult to control and often predicts a recession.