Inflation occurs when prices increase. Put another way, the value of the currency declines. So, if the price of an apple rises from 25 cents to 50 cents, we have inflation, as the value of a dollar declines from four apples to two. Inflation “debases” a currency; the dollar buys less.

Deflation occurs when the prices of goods and services decline.

Unexpectedly high inflation and deflation both create problems. Thus, in recent years, the Federal Reserve has been trying to keep inflation steady at about 2 percent per year.

Measuring inflation is difficult. Exactly what goods and services should be measured? We all consume different things, and the quality of those goods and services changes over time. If a car has more standard and safety features added, the price will rise. Is the price increase because of inflation or those added features?

Nonetheless, several indexes measure inflation. The Consumer Price Index (CPI) measures changes in the prices of a basket of goods and services purchased by an average urban consumer. The Producer Price Index (PPI) measures price changes in the selling prices of goods and services from the manufacturer’s perspective; it measures the cost of production at the wholesale level. The GDP deflator is a broad measure of prices of all domestically produced goods and services in the United States. Unlike the basket of goods behind the CPI, the goods and services underlying the GDP deflator changes from one year to the next.

THE LESSON

Extremely high inflation and any amount of deflation are two of the most worrisome risks you face as an investor; either could derail your financial planning. Savings accounts are especially vulnerable to inflation if the inflation rate exceeds the account’s interest rate. Savings accounts are also vulnerable to deflation because the interest rates they offer are lower when there is deflation. Your social security payments may increase if the CPI increases. Cost of living wage adjustments (raises) and other fees may also depend on the CPI. The rates of return offered by Treasury Inflation Protected Securities (TIPS), a type of U.S. government treasury bond, rise and fall with changes in the CPI. Monitor inflation indices and adjust your financial plan accordingly.

Undoubtedly, you have heard someone say, “The only sure things in life are death and taxes.” Possibly, someone heard you say it. Whether motivated by cynicism or realism, this observation about life emphasizes the uncertainty and unpredictability about our tomorrows.

The purchasing power of your dollar tomorrow, next month and next year is not guaranteed, and never will be (except in a country with total price controls; let’s hope that never happens).

So, how do you live in a world with no guarantees, without going crazy and without making other people crazy?

You maintain your physical health. Uncertainty and chaos will test your resilience and ability to rebound. Without physical stamina, a healthy diet and regular exercise, the uncertainty and chaos will beat you down.

You avoid dangerous drugs and excessive alcohol. A predictable response to pain, be it emotional or physical is to deaden it. Drugs and alcohol serve that purpose, but they come with too great a cost – a debilitating cost.

You accept the reality of uncertainty and reframe it as an opportunity. Yes, you can turn lemons into lemonade; you can also be a franchisor of lemonade stands.

You reach out to family and friends when you need support; you can also provide support when they need it. They too are trying to cope in a world without guarantees.

You accept the basic premise of this book, a premise based on the yin-and-yang forces of life. As we stated in the Introduction, the yin and the yang connote the complementary, harmonious fusion of seemingly opposite forces. You accept that both financial wealth, and psychological and physical health, represent attainable goals and outcomes, even in times of uncertainty.

Because life is uncertain and unpredictable you have the opportunity (and it is an opportunity) to experience the challenge and the power of personal achievement.

We guarantee it!