Have you noticed all the news about inflation recently? This topic sure is blowing up. 😉

Get it?… Blow up? Like balloon inflation?

Wa-WAH. I’m sorry, bad joke. Honestly most of my jokes about inflation usually fall flat.

OK, that was the last one, I promise! It’s just really difficult for me to write about boring topics like inflation without making crappy dad jokes to lighten the mood a bit.

A few readers asked me to write an article about inflation, given that it’s a hot topic right now. But if I’m being honest, it’s a really nerdy thing to research and blog about. Not to mention there are a million articles already that explain inflation 1,000 times better than I ever could. (Actually here’s one written by my pal Jesse that covers the top brilliantly → What is inflation)

Soooo… Instead of writing a traditional post about inflation, I thought we could have a fun little quiz game. For all you experts out there, let’s see how smart you are about the topic of inflation. And for you beginners, you can learn while answering some fun questions!

Also, to keep it fun, I’ve sprinkled in some photos of my own inflation/deflation experiences from my travels!

Let’s get to it. These questions are multiple choice or true/false style. Just pick the answer you think is the “most right,” and see how you did at the end. There are 11 questions total.

All the answers are at the bottom — no peeking!! 

Question #1: What is “inflation”?

1. Inflation is a special type of retirement account that rich people invest in
2. Inflation is when the stock market swells up and inflates like a bubble.
3. Inflation happens when investors feel extremely confident about stocks and their heads start to inflate.
4. Inflation is an increase in prices for goods and services that people buy. It’s also when money loses purchasing power over time.
5. Inflation is when your credit score increases without you even doing anything.
6. Warren Buffet invented inflation; that’s how he became the richest man in the world.

Question #2: How is inflation typically measured and tracked?

1. Investors should track their own inflation, just like their net worth. Personal Capital offers tracking for free and can tell you how much inflation you have each month across all your accounts.
2. Companies like Zillow track all real estate prices and know how much everyone’s home value rises each month. They take the average price increase across the entire USA to figure out how much inflation happens every month/year.
3. This thing called the CPI (Consumer Price Index) is used to track and measure inflation. It tracks the prices of about 80,000 consumer items and monitors the change in what people pay for them month over month.
4. The BTI (Bureau of Treasury & Inflation) is in charge of tracking all the data. They use 5 key metrics to measure inflation, which are real estate, oil prices, food/beverage prices, apparel purchases and wage increases. 

Inflation pic from Cappadocia in Turkey!

Question #3: What causes inflation? Why do things get more expensive over time?

1. When people want goods & services faster than they can be manufactured, prices increase because there’s less supply and more demand.
2. As manufacturing costs rise, businesses have to charge more to make a profit.
3. When the cost of living rises, so do people’s wages because they need more money to live. Inflation is built in.
4. It’s a mix of all the above.

Question #4: Is inflation a good or a bad thing?

1. It’s a bad thing because everything is getting more expensive! My dollars can’t buy as much as they used to, which means I’m saving less, and it’s harder to buy a house because the market goes insane.
2. It’s a good thing because it means the economy is growing! My house is rising in value, all investments are going up, and I even got a pay increase!
3. Inflation has both good and bad effects. It depends on your situation and perspective.

Question #5: True or False?…. If inflation gets too out of control, the government will give everyone more stimulus checks to help pay for things.

1. True
2. False
3. Inflation has nothing to do with printing money

Question #6: Over the last 100 years, what is the historical average inflation rate in the United States?

1. 2.8% per year
2. 3.2% per year
3. 2.3% per year
4. 9.8% per year

The white shite ran over a bolt and my tire suffered from deflation.

Question #7: When inflation rates rise, what do interest rates do?

1. Interest rates rise
2. Interest rates drop
3. Inflation has no effect on interest rates
4. Who cares, because all debt is bad to have

Question #8: Who suffers the most from inflation?

1. Inflation mostly affects people who live in big expensive cities. That’s why everyone is moving to the country right now.
2. Inflation hurts businesses because they have to increase their prices and they will lose customers.
3. Inflation hurts cash savers, people with fixed incomes, and people who have debt with variable interest rates.
4. Inflation hurts people in the FIRE movement mostly because our FI number just keeps getting bigger.

Question #9: Who *benefits* most from inflation?

1. Businesses with fixed debt. Because they can increase prices to consumers and use the extra revenue to pay down their loans faster.
2. Governments in debt can benefit from inflation. Because if money is worth less each year, then the “real value” of their debt is reduced over time, too.
3. Land owners benefit from inflation. Because their values keep rising!
4. All of the above

Question #10: If inflation rates rise higher, I should probably…

1. Sell all my stocks because a bubble is probably forming.
2. Start hoarding cash, because I’m gonna need as much cash as possible when things get expensive later
3. Invest heavily in Dogecoin because all cryptocurrencies have a limited coin supply
4. Buy as much toilet paper as possible. Then when prices go up next year, sell it to others for a higher price. Cha-ching!
5. All of the above are dumb ideas. Do none of them.

Question #11: True or False?… The 4% rule accounts for inflation.

1. True
2. False
3. What is the 4% rule?

Inflating a bunch of balloons for a friend’s birthday surprise!

Okie dokie! Was that hard or easy?  Are you ready for the answers? Here you go…

Answers to Inflation Quiz:

Question #1: D. Inflation means costs for things rise over time. So $100 today won’t buy as much in the future.

Question #2: C. The CPI has been tracking prices and measuring inflation since 1913.

Question #3: D. Inflation happens in many ways.

Question #4: C. It’s both good and bad. In general, we want things to grow. Just not too fast!

Question #5: B. False! In fact, inflation is typically caused by an increase of money supply in the economy. Printing more money may lead to more inflation.

Question #6: B. 3.2% is the annual average inflation in the U.S. But it’s been as high as 18% and as low as -10% in some years. All past data can be found here.

Question #7: A. The higher the inflation rate, the more interest rates are likely to rise. This occurs because lenders will demand higher interest rates as compensation for the decrease in purchasing power of the money they are paid in the future. (Investopedia)

Question #8: C. Here are the people affected by inflation, thanks to EconomicsHelp…

Question #9: D. Also see the chart above!

Question #10: E. Don’t freak out or make any emotional changes to your investment strategy. Remember that the value of CASH gets lower when inflation rates rise, so only keep the amount you need for emergencies, and invest excess cash. Stocks are a great investment still because businesses rarely suffer with inflation. Oh, and Dogecoin is a horrible store of value because unlike many other cryptocurrencies, Dogecoin has an infinite supply.

Question #11: A. True. Many of us FIRE folk plan to retire based on the 4% rule (or 3% or whatever percent makes you comfortable). Anyway, the rule is based on withdrawing 4% of your portfolio for the first year, then increasing your withdrawals in line with inflation every year after that. So if you have a $1M portfolio, it doesn’t mean you can only withdraw $40k each year for the rest of your life. It means $40k in year 1, then a tiny bit more the next year, and a bit more the next, etc. Your cost of living will continue to rise, so your withdrawals need to rise also.

Sooo… How many questions did you answer right? Pretty easy quiz? Learn anything new?

I guess that wasn’t such a boring topic after all. I actually had fun researching and learning about inflation!

One last inflation pic for ya…

Me and wifey taking a hot air balloon ride in Temecula, CA, for my birthday a few years back!

Have a great day! Thanks for playing!

– Joel