Inflation: Monster or Myth?

When monitoring our cash flow we need to consider how inflation will affect our cash inflows and outflows going forward. Inflation has the potential to be a real cash pig in the future and could become a major problem for people when it comes to the outflows—their expenses. Unfortunately, inflation is one cash pig that we can't do much about. The environment in which we live will determine where inflation is going in the future, and there's nothing you can do to stop it, or even predict it.

But that doesn't mean we should give up and ignore it.

Before we try to go to battle with the mythical inflation monster, let's try to understand what it's all about.

What Is Inflation?

Dictionary.com defines inflation as:

A persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.

Inflation simply means that the price of goods and services is rising. If, for example, we bought a bottle of water for $1 on January 1 and a year later that same bottle cost $1.02 that would be a 2% rate of inflation. It also means that the purchasing power of $1 is declining since the same dollar can't buy the same bottle of water a year from now.

It results in increasing cash outflows—with no additional benefit to us. Things just cost more and there is not much you can do about it. As we'll see later in this chapter, this can have a significant impact on what your cash flow looks like ...

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