Inflation — slides
Financial Literacy Club
Money Fundamentals · Lesson 8
Inflation
Why prices rise, what it does to the value of your money, and how to think in "real" terms.
12-minute lesson · learnwithflc.org
Inflation · 1 / 21
Financial Literacy Club
Money Fundamentals · Lesson 8
Inflation
Why prices rise, what it does to the value of your money, and how to think in "real" terms.
12-minute lesson · learnwithflc.org
Today's goals
By the end of class, you'll be able to…
- Explain inflation and how it reduces purchasing power
- Estimate a real return by subtracting inflation
- Calculate how a price changes over time at a steady inflation rate
Warm-up
Name something that costs more now than it did a few years ago. Why do you think the price went up?
Think, then write your answer.
The big idea
Inflation
Why prices rise, what it does to the value of your money, and how to think in "real" terms.
Money Fundamentals · Lesson 8
Inflation is the general rise in prices over time. When prices rise, each dollar buys a little less. That's a loss of purchasing power.
Money Fundamentals · Lesson 8
In the U.S., inflation is commonly measured with the Consumer Price Index (CPI), published by the Bureau of Labor Statistics. It tracks the prices of a big basket of things people buy — food, rent, gas, clothing, and more.
Money Fundamentals · Lesson 8
Why do prices rise? Usually some mix of: people wanting to buy more than is available, costs going up for businesses (like wages or materials), and more money flowing through the economy.
Money Fundamentals · Lesson 8
Some inflation is normal. The Federal Reserve aims for inflation of about 2% a year over the long run. High inflation is the problem: it hurts savers and people whose income doesn't keep up.
Vocabulary
Real return
What your money earns after accounting for inflation. A rough estimate: your interest rate minus the inflation rate.
Money Fundamentals · Lesson 8
This is why money that needs to last a long time — like retirement savings — usually has to grow faster than inflation. Cash sitting still for decades quietly loses value.
See it
With 3% inflation each year, $100 of today's purchasing power falls to about $74 in 10 years, $55 in 20 years, and $41 in 30 years.
Today
In 10 years
In 20 years
In 30 years
Real example
When a raise is really a pay cut
Two quick situations that show why you have to think in real terms:
- Savings: Your account pays 1% interest while prices rise 3%. Your $1,000 becomes $1,010 — but things that cost $1,000 now cost $1,030. You can buy about 2% less than before.
- Pay: You get a 3% raise, but inflation is 5% that year. Your paycheck is bigger, but it buys about 2% less. In real terms, that's a pay cut.
Numbers that go up aren't always gains. Always ask: up compared to what prices are doing?
Try it together
Try it: inflation calculator
See what something costs in the future — and what today's money will be worth — at a hypothetical inflation rate.
Your numbers
The Federal Reserve aims for about 2% over the long run.
Results
What $100 of stuff costs in 10 years
$134
Same things, higher price
What $100 buys in 10 years
$74
In today's dollars
At 3% a year, money that sits still loses about 26% of its buying power over 10 years. To keep up, it needs to earn at least 3% a year.
Educational calculator, not financial advice. Results are hypothetical estimates based on the numbers you enter.
Activity · pairs · 10 min
Price Time Machine
- Pairs pick three prices: a $5 lunch, a $60 video game, and $1,200 monthly rent.
- Using the inflation calculator at a hypothetical 3% a year, they find each price after 10 and 30 years.
- They find what $100 kept as cash would buy after 20 years.
- Discuss: what does this mean for money you won't need for decades?
Check for understanding · 1 of 3
Your savings account pays 1% interest while prices rise 3% this year.
What happened to your money's purchasing power?
- AIt grew about 1%.
- BIt fell about 2%.
- CIt grew about 4%.
- DIt stayed the same.
B. It fell about 2%.
Real return ≈ 1% − 3% = −2%. You have more dollars, but each buys less.
Check for understanding · 2 of 3
You get a 3% raise, but inflation that year is 5%.
In real terms, what happened to your pay?
- AIt went up about 3%.
- BIt went up about 8%.
- CNothing changed.
- DIt went down about 2%.
D. It went down about 2%.
3% − 5% ≈ −2%. Your paycheck grew, but your buying power shrank.
Check for understanding · 3 of 3
Keeping a large amount of cash at home for decades protects it from losing value.
- True
- False
False
The number of dollars stays the same, but inflation shrinks what they can buy. Over decades, that loss can be large.
Remember
Key takeaways
- Inflation = rising prices = each dollar buys less.
- Real return ≈ your return minus inflation.
- The Federal Reserve aims for about 2% inflation over the long run.
- Long-term money usually needs to grow faster than inflation.
Discuss
Talk it over
- Ask a parent or grandparent what something cost when they were your age. How much has it changed?
- Who is hurt most by high inflation? Who might not be hurt as much?
Exit ticket
Your pay rises 2%, but prices rise 4%. Did you get a raise? Explain.
Answer on your exit ticket before you leave.
Nice work today.
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