Hey Mom...What’s Inflation? How to Talk to Kids about Inflation

The concept of inflation is a difficult one to illustrate to kids, however, we have a guide on how to do just that.

As an adult, we want children and teenagers to make smart decisions and have a sense of responsibility surrounding money. When we first start personal finance discussions, we often mention topics such as earning, saving, budgeting, and spending. What adults often glaze over is the idea of inflation. In the spirit of full transparency, the concept of inflation is a difficult one to illustrate for kids. However, getting them to understand inflation will better prepare kids for handling money in the real world.

The easiest way to teach kids about inflation is with an example. Begin by introducing the key vocabulary: Inflate & Deflate. Start by slowly inflating a balloon, stopping periodically to show that air does not have to be continuously forced into the balloon for it to grow. Explain that when a balloon is inflated, it bets bigger. When prices are inflated, that means that the cost gets bigger or “more expensive.” When you slowly release a little bit of air from the balloon, that can illustrate the concept of deflation. Deflation is when something gets smaller or when the cost of something goes down or “gets cheaper.” (Don’t we all wish this would happen more often?!)

Next, ask your child to list 3 things that we spend money on (ie: candy, movie theater, gasoline). Now it is time to have the “back in my day...” conversation. List out the three items or activities that your child chose and then write the value of those items in one color, indicating what the typical cost was when you were their age. Next, use another color to indicate the typical cost of each for the current year. Inflation is measured across one year, so this is a quick and easy way to show that inflation means that the price of something goes up or gets more expensive.

This will lead you into a discussion that answers the question: Why does inflation happen? There are several reasons, but when introducing inflation to a younger audience, they can be broken down and explained into two main categories: Demand-Pull Inflation and Cost-Push Inflation

Demand-Pull Inflation happens when there is not enough of something. Explain it to your kids like this: You own an ice-cream shop and 10 kids want a milkshake, but there’s only enough ice cream for you to make 5 milkshakes. You can decide to raise the price of your milkshake because you have fewer to sell, but you know that some of your customers are willing to pay more to satisfy their sweet tooth.

Cost-Push Inflation happens when the cost of a good or service goes up, and the business must raise their price to continue making money. Explain it to your kids like this: You go to the store to buy the milk and sugar you need to keep making ice cream to sell. You notice that the cost of the milk and sugar has gone up (the ingredients are more expensive). You decide to raise the price of your ice cream so that you can keep making a profit.

Ultimately, it is important to end this conversation with a discussion about how inflation impacts you and your family. From cancelled family trips or eating at home more often than visiting a favorite restaurant, there are many ways inflation can impact you and your family. This can be disappointing or even scary for kids, so it is important to find a positive focus. Explain to your child that inflation is not a permanent problem and ultimately encourages you to make smarter decisions about money. Studies have shown that kids and teens today have a much deeper awareness of the positive and negative impacts of money. It is important to use examples like the ones illustrated above to make sure kids have a true understanding of personal finance. Example: “Yes, the cost of food has gone up...but remember that we have been trying to eat at home because we can eat healthier and spend more time together as a family!” Or “The cost of gas has increased, but that means we can ride our bikes to the library instead so that we can get more exercise!”

While inflation can contribute to financial challenges for many families, it is ultimately your job as an adult to be honest with your child. Keep in mind that it is never too early to teach your kid about financial literacy. Your child may not fully understand what inflation means, but they are sure to notice when their own money doesn’t stretch as far. Making the money conversation a priority in the household can help children understand the importance of smart financial planning, and they will surely thank you when they become an adult.