How to Talk to Your Kids About Inflation

By Dawn Kellogg

From eggs and milk to utilities, the cost of everyday items is going up. Inflation is encroaching on the family budget. Discussions around the dinner table increasingly include the high cost of everyday things and how to accommodate that within the budget.

Kids are observant. It’s likely that they are noticing the fact that their allowance money isn’t going as far as it used to. So how do you explain inflation to your kids and what that means for your family budget?

Firstly, how do you define inflation to your kids if they ask what it means? Inflation, pure and simple, is when the cost of goods and services rises. Nearly everything becomes more expensive, and you have to pay more for everyday items, but you don’t receive more (sometimes you receive less). Inflation means that our overall cost of living is rising.

One of the most common ways to measure inflation is the Consumer Price Index (CPI) used by the U.S. Bureau of Labor Statistics. The CPI gets its figures by surveying businesses and recording the prices of consumer goods on a monthly basis – everything from food and clothes, to healthcare and housing costs. Keeping the rate of inflation low (around 2%) is one of the Federal Reserve’s dual mandate objectives (along with stable and low unemployment levels), but inflation in 2022 the rate of inflation was more than 8%.

There are several causes of inflation, which can be broken down into 3 main categories:

• Demand-Pull Inflation – when the supply of products or services cannot keep up with demand
• Cause-Push Inflation – the cost of producing products and services goes up and businesses have to charge more so that they can make money
• Built-in Inflation – when workers need higher wages to keep up with the rising cost of living

Of course, the COVID-19 pandemic has had a major effect on the current state of our economy. Many businesses continue to struggle with staff shortages, but thanks to stimulus payouts, many consumers have more money to spend and until recently, interest rates were relatively low.

Inflation is not necessarily a bad thing. Moderate inflation is normal and is the sign of a strong economy, but a high rate of inflation signifies that the value of our money has gone down. Conversely, the decline of prices fall (deflation) and when an economy stops growing altogether (stagflation) are harmful to the overall economy. Balance is important.

Inflation can affect families in many ways, from cancelled or altered vacations due to rising costs, to the amount of extras that we are able to afford.  This provides an opportunity to talk to your kids about the economy, smart financial planning, and about needs and wants. Brette Sember, author of The Everything Kids’ Money Book, says, “Kids may see that their parents are stressed or worried about money. Explaining inflation can help them put a name on it and understand what has happened.” 

Explain that higher prices mean that more of the family’s money has to go toward those things that are needed and that there is less in the budget for wants such as entertainment, toys, etc.

Have kids help with meal planning, grocery shopping and other activities that involve the family budget. “Get kids on board with finding ways to save money or reduce expenses,” Semper says. “Things that they can help with then become less scary.” Let them brainstorm budget-friendly family meals. Give them a list of items to compare prices on at the store and explain the difference between store brands, generic brands, and brand names.

When you feel it’s right, include kids in age-appropriate discussions about family finances. Ask for input in low-stakes financial decisions that affect the whole family. For example, if you’re planning a trip, discuss the options and costs of how to get there (flying vs. driving), where to stay (hotels vs. visiting friends or family) or staying at home for a fun family staycation.

One word of caution: Keep serious money discussions between adults in the family. Also, if you notice your kids regularly asking money-related questions, this could be a sign that they are sincerely worried or stressed, so be sure to reassure them. Explain that while inflation is a bummer, things will eventually even out and be normal again.

Dawn Kellogg is the Public Relations and Community Engagement Specialist for The Summit Federal Credit Union