Editors’ note: 

For church leaders to be more effective in seeking the “welfare of the city” (Jer. 29:7), we should know what economic concepts mean, how they should be applied, and how they affect the church. The purpose of the Economics for Church Leaders series is not to present a theology of economics, but rather to provide a basic level of understanding that will help church leaders think more clearly about how to apply their faith commitments to economics and public policy.

The Term


What It Means

Inflation refers to a general increase in the prices of goods and services in the economy over time that causes an imbalance that leads to a decrease in the value of money.

For inflation to occur, there must be an increase in numerous categories of goods and services, not just in one or two, even if they are substantial. For instance, housing prices in an area may spike, but that doesn’t mean you are facing inflation. Even an increase in a commodity, such as oil, that affects a range of goods and services does not necessarily lead to inflation. An increase in inflation occurs when almost everything you buy becomes more expensive.

The concept of time also makes it difficult to comprehend inflation. We see prices have increased and automatically assume that a good or service has become more “expensive.” But while prices tend to increase over time, inflation only occurs when there is an imbalance that causes the value of money to decrease relative to income or savings.

Imagine, for example, that a child living in 1990 makes a weekly allowance of $1 and a candy bar costs $1. Fast-forward two decades. Now that child has grown up and pays his own child an allowance of $2.10, and a candy bar now costs $2.10. Even though the cumulative rate of inflation increased 109.9 percent from 1990 to 2021, inflation did not really affect the cost of the candy bar. In both cases, the cost of the candy was the same relative to income: one week’s allowance.

Why It Matters

Inflation hit a 13-year high last month, as the costs of new cars, food, gas, and restaurant meals all jumped. While it was once one of America’s greatest economic problems, inflation has been historically low for so long that many people (especially younger people) don’t know why it matters.

The short (and imprecise) answer is that inflation makes us poorer. Inflation would not make us poorer if our income (such as wages and interest on savings) increased at the same rate. But that’s not usually what happens. In the real world, the cost of living can increase rapidly while our income is slower to respond. This is why inflation is particularly harmful for people who are unable to increase their income quickly enough to respond to higher prices, such as those on fixed incomes or workers who do not receive annual cost-of-living increases.

If you took a job in 2015 making a salary of $50,000 then you could buy $50,000 worth of goods and services that year. But if in 2021 your salary remains at $50,000, then because of inflation you can only buy $42,132 worth of goods and services. The value of your money has decreased by 15.7 percent. To be making the same amount of money you were earning in 2015, your salary would need to increase to $57,867. You are poorer than you were five years ago (in the sense that you can consume less good and services) even though the dollar amount of your salary has not changed.

This is the most direct way inflation affects our communities. But how we think about inflation (or, more often, don’t think about it) also has significant effects on how church leaders deal with finances.

Inflation, when combined with the anchoring effect, can cause us to have a skewed understanding of prices, especially the price of labor. The anchoring effect is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. A prime example of such information is a price that occur during your youth or early adulthood. We tend to think of such a price as the “norm” throughout our lives. If a candy bar costs 5 cents when you’re a child or a house cost $100,000, then that is the “anchor” price that we think of as the “right,” “correct,” or “reasonable” price for that good or service.

This can skew the way we make financial decisions. Imagine, for instance, a pastor who takes his first job at a church at the turn of the millennium and earns an average salary, which for clergy in 2000 was $33,760. Because of the anchoring effect, that same pastor in 2021 might presume that new pastors should earn about the same amount today. He may even think that because of inflation he should add $10,000, and so assumes a generous starting salary would be $44,000. In reality, for the new pastor to make the same starting salary as the pastor who was hired two decades ago, the pay would need to be $53,778.

When thinking about church finances, it can be helpful for church leaders to use an inflation calculator. Comparing today’s prices to an anchor year (such as when we graduated college or began working in ministry) can help us see the effects of inflation more clearly.

Other Stuff to Know

Consumer Price Index

The inflation rate is typically measured by changes in a price index. The most commonly used price index is the Consumer Price Index. The CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

There are more than 200 categories of items in the index, arranged into eight major groups (food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services). Included within these major groups are various government-charged user fees, such as water and sewerage service, auto registration, and roadways.

The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage-earners and clerical workers. The all-urban consumer group represents about 93 percent of the total U.S. population. Not included in the CPI are the spending patterns of people living in rural nonmetropolitan areas, those in farm households, people in the Armed Forces, and those in institutions, such as prisons and mental hospitals.


While inflation can be harmful, deflation—a general decline in prices for goods and services—can be even worse. Deflation can have a similarly harmful impact on consumers and the economy as inflation but can be more difficult to fix. This is one of the reasons why the Federal Reserve aims for inflation of 2 percent over the longer run. By allowing an “acceptable” level of inflation, the Fed is able to prevent prices from quickly reaching a state of deflation.

Trust Not in Gold

In 1933, the United States went off the gold standard, a monetary system in which currency is backed by gold. Ever since then, many Americans have believed that we could avoid inflation by merely getting back on the gold standard. The reality, though, is that the gold standard is not a guarantee of price stability. Indeed, it places control of our money with the suppliers of gold, who are mostly not Americans.


Hyperinflation refers to rapid and unrestrained price increases in an economy, typically at rates exceeding 50 percent each month over time. There have been about 60 confirmed episodes of hyperinflation in history. As economist Tim Hartford notes, “most instances of hyperinflation” occurred either in central European states after World War I (including the infamous crisis in Weimar Germany), or during or immediately after World War II (including Hungary, history’s worst example of hyperinflation), or “in the Eastern Bloc as the Soviet Union disintegrated.”