Gas, Food, Rent - Inflation is on the Rise. What does that mean for you and your money?
Inflation is when the price for the same amount of goods (i.e., groceries) or services (i.e., getting a haircut) increases. Think about it this way. The same haircut that cost you $15.00 a year ago may cost you $25.00 today. There is no change in the service but an increase in the price.
There are a couple of factors at play when discussing the current state of inflation. One, over the course of the past year, the government issued three stimulus checks to help those financially struggling and also in hopes it would be a push to get the economy back going. Two, we are hoping to be nearing the end of the COVID-19 pandemic. As more people are becoming vaccinated, things are returning to pre-pandemic consumer activity. As a result, many people are now starting to see an increase in price for goods and services, such as gas prices. Economists are crediting the rise in inflation to the U.S. economic recovery. According to the United States Bureau of Labor Statistics, inflation has increased more than 4.2% since last year, and inflation in April accelerated at its fastest pace in more than 12 years.
How does inflation affect everyday spending?
Inflation affects everything involving the economy from food and clothing to employment wages and interest rates.
The Consumer Price Index (CPI) measures the price over an average period of time for a specified set of goods and services, including housing, gasoline, and food items. The CPI is important to know because it helps to measure when there is inflation (an increase in prices) or deflation (a decrease in prices). When prices for goods increase, it can lower the consumer’s purchasing power or the value of a currency in buying these goods, which means it will decrease the number of goods and services you can purchase.
Inflation also relates to the economic term, supply and demand, which means the number of goods/services available for people to buy compared to the number of goods/services that people want to buy. If the public wants to buy an item (demand) but there is a shortage, the law of supply and demand says that an item can be priced at a higher rate (supply).
Inflation can be seen in everyday activities, such as grocery shopping, filling up your car, or paying your utility bills.
How does inflation affect investing?
Assets such as your savings account and fixed income investments (bonds, CDs, treasury accounts) are more likely to be subject to inflation and may cancel out the interest rate earnings that you would receive. Inflation can diminish your savings because although you’re putting your hard-earned money into an FDIC-insured savings account, the average interest rate can’t keep up with inflation, which would, in turn, reduce your buying power. If you are using your savings account for your retirement or as an emergency fund, it's essential to factor in inflation to ensure you have enough money when you decide to start using those funds.
On a positive note, inflation can be a great way for real estate investors and homeowners to make a profit. The rise of inflation can ultimately increase the value of a property. On the other hand, for tenants who rent their homes, the price of their rent could rise over time due to inflation. This means renters could be seeing rental prices increase this year.
How will inflation affect me and my family’s short-term and long-term financial health?
Economists have encouraged consumers to “not panic” and pointed to inflation being a positive towards a recovering economy. However, realistically, with inflation on the rise, you can expect that the cost of living is expected to rise too. Groceries, gas, and renting will be more expensive for families all across America. To keep up with inflation, families will need to earn more money. In the past, this has meant demanding a raise from your current employer or working multiple jobs to maintain the same living standards as before. In an interesting take during the current inflation period, employers have had to increased wages as the struggle to hire has plagued the service industry.
Have you noticed inflation affecting your life lately? Comment below and share your story.