Written by 8:57 pm Finance & Economics: Explained

Why deflating inflation fears will keep us sane


If you caught one snippet from the financial news lately, it’s likely been about inflation. 

More specifically, the messages we’re reading say something along the lines of: 


(Okay, that might be a bit of exaggeration, but still, it’s in the ballpark). 

Looking at the headlines, and even just below the surface, it’s easy to understand why inflation grabs our attention right now. 

  • “headline” inflation rates are the highest in over 13 years in Europe and 30 in the United States. 
  • Since the 2008 financial crisis, inflation has been historically low. Many of us don’t even know what real inflation feels like.
  • We have ideas in our heads that inflation is inherently evil since goods and services get more expensive.

These last two points pick at us deeply. 

After all, no one likes to pay more for stuff, especially if salaries don’t keep up. 

Plus, we don’t know what inflation feels like. Instead, we associate it with historical imagery to help us make sense of what’s going around us. 

The problem is that the numbers in the headlines and the stories beneath them don’t tell the real, more nuanced story. 

Here’s how. 

Years and months aren’t the same. 

First, the headline rates we see (for example, 3.4% in September in the Eurozone) compare to last year. (It’s why economists call it the “year over year” rate). 

In other words, we’re looking at what happened in September 2021 and comparing it to September 2020. 

Yearly inflation changes in the Eurozone going back to January 2000 (source: ECB; Eurostat)

Economists (and many professional investors) prefer the month-to-month inflation rate as it paints a more real-time picture of price changes.  

Here, we’re comparing inflation in October to what happened in September. 

What does that look like? Well, much better

For one, inflation only went up by 0.8%. 

What’s more, when we zoom out, we see that inflation is behaving like normal. 

Monthly inflation changes in the Eurozone going back to January 2000 (Source ECB, Eurostat).

As you can see, month-over-month inflation is following the same pattern it had over the past decade when yearly rates were much lower than now. 

It’s also worth noting that year-over-year inflation picks up as the economy recovers from a downturn (more on that below).  

We’re seeing exactly that right now as the economy recovers from the pandemic. 

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A few bad apples are ruining it for us. 

It’s no secret that energy prices are way up this year, and supply lines are getting a beating, too. 

These problems are still in play as gas prices and bad weather luck continue to hit electricity and fuel bills. 

Logistics (also an energy-intensive industry) can’t keep up with demand. These two factors are ‘hogging’ all the inflation pressure, pushing the overall rate higher. 

In the Eurozone last month, inflation was at 3.4% YoY.

Electricity and gas (5.8%) and transport (8.5%) were the huge outliers. Taking them out, the inflation rate in Europe was only 1.45%. (food was at 1.9%).

Energy increases come from lousy weather, tons of demand for gas, and geopolitics.  

Transport is up because of supply chain issues, and way more people are traveling this year than last. 

In the US, used car prices are also driving up inflation. However, people only look for cars periodically. Unless they have some weird addiction, they aren’t buying a new vehicle each month.

Overall, the deeper dive into the data tells us a much more nuanced picture. 

Economists, investors, and central bankers are reacting as if inflation is transitory (because it likely is)

Raise your hand if you think 2020 was, by any definition, a typical year. 


Neither do most economists, central bankers, and professional investors. 

It’s normal prices are much higher than they were a year ago for them. 

In fall 2020, we were all headed back into some form of lockdown as the Coronavirus began another vicious wave and with no real solution to prevent mass death. 

People were terrified and, as restrictions went into place, many stopped or significantly curtailed spending. 

Travel stopped after a false start in the summer. Bars and restaurants closed. 

In other words: people stopped spending money, and prices dropped. 

Today, the situation looks much different, even if the pandemic is still with us. 

What’s more is that as people exhaust their extra cash saved up, spending levels will drop, cooling off inflation pressures. 

Central bankers and investors are keenly aware of this situation. Here are their takes:

Central bankers have two tools to control the economy: interest rates and buying stocks and bonds off of the market. Interest rates cool off an overheated economy by encouraging people to save. Buying stocks and bonds puts cash into the economy.  

Right now, central bankers in Europe and the US are (slowly) phasing out these purchases, reducing the amount of cash sloshing around out there. So far, only the Americans are talking about (cautiously) raising interest rates sometime next year. 

Importantly, central bankers want moderate inflation of around 2%. Why? It helps drive up wages and economic growth. Raising interest rates early or by too much would sabotage those goals.

Overall, their take is that these disruptions will pass while it might be a bit “hot in here” right now. They are largely the result of the pandemic economy, cooling inflation off in the process.

Professional Investors: these folks are the ones who move big ole f-k off sizes of money. They have teams of economists and analysts powering their decision-making. Their stance? For now, it’s not too much of a concern

For one, the stock market continues to grow at a far faster pace than inflation. This confidence reflects their belief that the overall economy is in better shape than the headlines let on.

Second, corporate profits continue to beat expectations. That means that not only do consumers feel comfortable, but also they’re willing to pay higher prices as they spend excess savings.

More importantly, the interest rates for bonds are still mostly flat. Bonds (loans to companies and governments) are super sensitive to inflation pressure. When inflation goes up, investors’ interest rates to lend money go up. (Since they need a higher return to make up for the impacts of inflation). 

Investors haven’t started asking for higher yields or interest rates yet since they don’t see inflation as a problem over the long run. 

Should we ignore inflation and what it’s doing to us? Absolutely not.

Keeping an eye on prices and how that impacts our lives is one of the most important tools for making awesome money decisions. 

Of course, we have readers from all over the world. What’s happening here in Europe varies from country to country (the US too).  

(Not to mention, many parts of the developing world face an entirely different set of circumstances).

However, like anything else, financial news doesn’t exist in a vacuum. 

Context is equally if not more critical to staying calm and getting (financially) ahead of the masses, and not make short-sighted investments.

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