How to Explain Inflation to Kids

March 5, 2023 byConnections Academy

6 min to read

Inflation has been in the news a lot lately. And with the inflation rate having exceeded 7.5 percent in 2022, it has directly affected every family in ways large and small. But despite its importance, inflation isn’t easy to explain — particularly if you’re talking to your child.

If your child has been asking about inflation, you may be struggling to give them a clear response. Inflation explained simply is the cost of goods and services going up. But that doesn’t answer most kids’ biggest question: why?

That answer may seem daunting, but don’t worry. Here’s how to explain inflation to a child.

Understanding Basic Economics

Even if inflation wasn’t a concern, financial literacy for kids is important. It helps them understand how the world works.

Economics can be complex, but the basics are easy to explain to a child. All you need to do is help them make a connection between earning money and buying something. And the best way to do that is through an allowance.

When you give your child an allowance for chores they complete, they get a good sense of what earning money requires. Then when you take them to a store, they can compare the money they’ve earned to the cost of toys or treats. You may be surprised at how fast they make a connection between the two—and how reluctant they are to spend their hard-earned money on an expensive toy they were begging for just last week.

Once your child has gained a fundamental understanding of how economics works, you can start explaining inflation.

How We Measure Inflation

Inflation and math go hand in hand. That’s important to note when describing inflation to your child. Although we often say we feel the effects of inflation, it’s not something that’s measured by feelings. It’s measured with math.

The U.S. Bureau of Labor Statistics (BLS) measures inflation through the Consumer Price Index (CPI). While the specifics of the CPI measurement are quite involved, you can explain CPI to your child by comparing it to a shopping cart.

CPI measures the cost of everything in a shopping cart compared to what the exact same cart would have cost last month. And the BLS puts a lot in that cart. It includes groceries, your power bill, your rent, your medical costs, and nearly everything else you may have bought in the last month—from a meal out to a trip to the bowling alley.

However, the exact makeup of the cart is less important than your child’s understanding that the cart contains a wide variety of items and that CPI measures the total cost of everything in the cart. From month to month, the prices on some items are likely to rise much faster than the prices on others, but CPI isn’t designed to measure price changes for one or two items. It’s designed to tell us if prices, when averaged as a whole, are going up. If they are, we’re experiencing inflation.

Causes of Inflation

Once you’re sure your child understands the basics of inflation, you’re ready to answer the question why. Why does inflation happen?

To answer this in a way a child can understand, you first need to consider inflation for kids. What is inflation for kids? It’s inflation that affects them directly. In other words, it’s not about the price of cars or gas or even most foods. It’s the price of something they routinely purchase.

By focusing on a product your child likes and understands, you can tell the story of inflation in a clear yet simple way. For example, you can use a kids meal from your child’s favorite restaurant. Through that, you can explain the two main causes of inflation.

Demand-Side Causes

Called demand-pull inflation, demand-side causes of inflation happen when demand for products and services increases. While demand for an individual product might increase if it becomes popular, the kind of widespread inflation measured by CPI requires demand going up for lots of things.

To explain this to your child, ask them what they would do if you raised their allowance. Most likely, they would want to buy more things. Now ask them to think about what would happen if everyone’s allowance went up. If that happened, everyone would want to buy more things, meaning demand would go up.
And when demand rises, prices follow close behind.

Supply-Side Causes

Called supply-push inflation, supply-side inflation happens when a product or service isn’t available in the amount people desire. While this is common with individual products (think of a popular toy around the holidays), it doesn’t tend to happen on a large-enough scale to affect overall inflation rates.

In the example with a kids meal, if there was a global shortage of meat, dairy, vegetables, and grains, the restaurant would have to pay more for their ingredients and would thus have to raise the prices. If a mass food shortage persisted, the prices on the kids meal and all kids meals everywhere would stay high and would ultimately lead to other people raising prices on other things to afford to eat.

Fortunately, most shortages are easily fixed by increasing supply. Which is why supply-side inflation is rare.

Parents discussing inflation with their child.

Helping Children Address Financial Anxieties

Negative stories in the news can negatively affect children’s mental health. That is as true for stories about inflation as it is for stories about crime and natural disasters. While you can limit your child’s exposure to the news, you’re unlikely to shelter them completely. What do you do if your child is anxious about inflation?

There are a lot of good tips for helping children cope with anxiety. These include:

establishing a daily routine that makes your child feel safe and comforted
teaching deep breathing to help curb the physical symptoms of anxiety
hugging your child regularly to help them relax and feel safe
talking to your child about what they are feeling and what they can do to address their worries

That last piece of advice can be particularly helpful when dealing with anxiety caused by inflation. Simply explaining to your child how inflation works can help reduce their worries. You can also reassure them that you will care for them regardless of financial concerns.

If anxiety persists, you may consider talking to a school counselor or transferring to an online school where you can have more control over their day and be there for them when they need you most. A top-quality online school like Connections Academy^® even has highly trained counselors ready to work with your child one-on-one.

For more advice on how to help your child through anxious times, take a look at our article on improving your child’s social and emotional well-being.