Explaining Inflation to Kids

Turn on the news or sit around any dinner table, and it's likely there will be a mention of inflation, gas prices, or the increasing cost of living. Helping kids understand and navigate complex concepts like inflation in an age-appropriate way is an important component of financial literacy. In fact, breaking down how inflation affects our daily life can teach kids valuable lessons on how to make spending and saving decisions in leaner times.

 

So how do you provide an inflation definition in a way that isn't confusing or boring? Here's a quick game plan for having this important money conversation with kids.

 

Related: Teaching kids about money

 

 

What is inflation?

Inflation is a rise in prices, measured over a certain amount of time. Inflation affects us because it means that over time, you can buy fewer things with the same amount of money. For example, now, you could buy 5 lollipops for $1. In five years' time, $5 might only get you 2 lollipops.

 

The inflation rate is measured in percentages. If you hear something like inflation is 8%, it means that prices are 8% higher now than they were this time last year.

 

For kids who don't understand percentages yet, use figures to explain. Last year, a new toy cost $5. Today, the same toy might cost $5.40. You're getting the same item, but the price has inflated or gone up.

 

From there, paint the bigger picture. While a few cents more might not seem like a big deal, explain that if everything you buy increases at the same rate, your purchasing power goes down. That means you get less for the same amount of money.

 

Related: Financial words to explain to kids

 

Why does inflation happen?

There are a lot of things that can cause inflation, and we refer to them as different types of inflation. One type is demand-pull inflation. This is when the demand for an item is greater than the ability to provide it. Limited edition toys or concerts with small seating numbers are good examples. 

 

We also have cost-push inflation. This is when the price of materials or wages rises, and the price increase is pushed onto the customer. For example, the price of a cake could rise because one of the ingredients costs more, or because the baker is paying themselves a higher wage. In this case, a cake that used to cost $3 would now cost $3.80.

Related: Questions that kids ask about money and how to answer

 

Is inflation good or bad?

There are pros and cons to inflation. 

 

Pros of inflation:

• A small amount of inflation is a sign that the economy is doing well.

• Inflation reduces the value of debt (if there is no interest). When someone borrows money and there is inflation, then the value of the money they repay is less, even if it’s the same amount. 

• Inflation can lead to an increase in wages. When people pay businesses more for items, it means there is extra profit that can be passed on to employees. 

Cons of inflation:

• If there is inflation but no increase in wages, everyday items become too expensive to afford. 

• Inflation can reduce the value of your savings. 

• Inflation can get out of control. If there is too much inflation, businesses cannot afford to stay open, as they cost too much to run. This can lead to the loss of jobs and an increase in poverty.

Discuss how inflation affects allowance

When inflation occurs, the value of money decreases, meaning that you can buy less with the same amount of money. This can have a negative impact on allowances, as they may not be enough to cover the cost of goods and services that children need or want.

 

For example, if the inflation rate is 2%, then the cost of goods and services will increase by 2% over the course of a year. If a child's allowance is $10 per week, then this will only be worth $10.40 in a year's time. This means that the child will have less money to spend on things like clothes, food, and activities.

 

There are a few things that parents can do to help their children cope with inflation and ensure that their allowances are still sufficient.

• Index-link allowances: This means that the allowance is automatically increased each year in line with the rate of inflation. This ensures that the allowance keeps pace with the rising cost of living.

• Increase allowances regularly: Even if you don't index-link your allowances, it's a good idea to increase them regularly, perhaps every year or two. This will help to ensure that your children have enough money to cover the cost of goods and services.

• Help your children develop good financial habits: Inflation can be a good opportunity to teach your children about the importance of saving and budgeting. By helping them to develop good financial habits, you can help them to cope with inflation and reach their financial goals.

 

 

Discuss how inflation affects our daily life

Here's an example you can use: Say your kids like to treat themselves to $5 worth of sweets once per month, using their pocket money. Now, because of inflation, the store has increased its prices to $1.25 per item, instead of $1.

 

Explain that now the kids have a decision to make: They can either spend an extra dollar of their allowance to get the same five bags of sweets as usual, or they can choose just four sweets and stay within their $5 budget.

 

What is stagflation?

Stagflation is a mixture of inflation and stagnation. Stagnation means slow, not moving, or stuck. So, it means that the economy isn't growing, there might be high levels of unemployment and low demand for items. At the same time, inflation is happening too. Just like it's a tricky concept to explain, economists also find it hard to fix. If you try to fix the inflation, you could make the stagnation worse, and vice versa.

 

What is deflation?

Deflation is the opposite of inflation — it’s when the price of things goes down over a certain period of time. A good way to explain this is to compare it to a balloon deflating. Just like the air goes down a balloon, deflation refers to prices going down in the economy. 

 

A lot of things can cause deflation, but unemployment is normally the biggest reason. When people are unemployed, they usually spend less money and buy fewer things. This means that there is less demand, and so businesses lower their prices, to encourage more people to shop. So, the value of everything goes down.

 

Illustrate the impact of inflation on your grown-up budget

Finish off your lesson by explaining that just like their sweetie dilemma, you have to make a whole bunch of these decisions every day in order to pay for the things your family needs. Explain that what you can afford to spend on groceries and gasper week doesn't go as far as it used to. A leaner budget requires delayed gratification, making sacrifices, and some creativity.

 

Then, model some frugal behaviours, like incorporating meatless meals that cost less, carpooling with friends, or using apps to find discount vouchers or cheaper gas prices. If you've been working a side hustle to bring in more income to make up for the price increases, point that out, too.

 

When discussing how inflation affects our daily life, the ultimate goal is to demonstrate that despite tough economic times, with smart and strategic money moves, you can stay in control of your finances.

 

Teach kids early to make smart money choices with GoHenry's kids debit card and the fun, in-app education suite Money Missions. 

 

 

 

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