The Inflation Rate’s Rising: Here’s Why You Need to Invest

Key Takeaways
  • The COVID-19 pandemic caused inflation rates to rise as the federal government had to spend $4 trillion to help the economy resume normal activities.
  • The high inflation rate caused the purchasing power of the United States dollar to lower as there was more money in circulation.
  • It is essential to invest any leftover disposable income into the stock market in hopes of receiving returns that are greater than the current inflation rate. 
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The COVID-19 pandemic caused the economic growth of the United States (U.S.) to come to a halt. As a result, many Americans relied on the COVID-19 relief packages the U.S. government provided. This allowed Americans to have some financial stability monthly until the economy recovered.


A significant piece to the relief packages was the disbursements of the stimulus checks. However, the large sum of money released to the public to aid their expenses caused the inflation rate to rise as the money supply in circulation was greater than before. 


How is the Inflation Rate Measured?


When the federal government or one of its establishments wishes to measure inflation over the past year, they use the Consumer Price Index (CPI). CPI is calculated by determining the total price for a basket of goods in a base year, usually between 1982 to 1984.


Afterward, they determine the basket price of the same goods in the current year, telling them how much the price has increased or decreased. The two basket prices are then divided, and the outcome is the inflation rate for the current year. When this year’s CPI was calculated and compared to the previous year’s, it was determined that the CPI had risen an additional 0.9%. The increase in inflation indicates rising prices and a higher cost of living.


Why is the Inflation Rate Rising?


The inflation rate is rising as the pandemic caused many people to be left without work. In a report released by the Bureau of Labor Statistics, 15% of the workforce was unemployed in April 2020, at the pandemic’s peak. 


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The pandemic caused the federal government to spend $4 trillion in relief packages, and the federal reserve printed more money so the government would have the resources to fund these packages. Thus, it resulted in higher prices as corporations had to pay more to attain the same level of goods. Consequently, they raised their prices to maintain similar profit levels. The price rise led to the consumer having a higher cost of living due to these increased prices. 


How to Fight Inflation 


Inflation can negatively affect your financial situation. It must be dealt with on an annual basis to ensure that it does not lower your purchasing power over a prolonged period of time. As a result, there are a couple of ways you can prevent or reduce the chances of your income having a lower purchasing power.


Ask for a Raise


The first thing you can do is ask for a raise at your place of employment. As inflation causes the cost of expenses to increase, the amount of your current salary that can be labeled as disposable income will decrease. 


Image Credit: Ahmet Misirligul / Shutterstock.com


This decrease would be due to the cost of living rising annually. If your salary does not increase by the same level as the inflation rate, your purchasing power will lower over time. Therefore, you must ask for a raise at least once a year to ensure you retain a similar amount of money annually.


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Invest in the Stock Market


The second thing to do, which is probably the most important, is to invest. Whether it’s $5 or $500 every week, every little bit helps because the stock market usually increases each year. 


If you believe you do not have enough to invest, go over your monthly expenses and determine whether you are paying for unused items that can quickly be canceled, giving you the possibility of investing more money. Saving the money from these unused fees means that the money invested will be rising with the inflation rate, allowing you to maintain the same level of purchasing power. 


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Furthermore, the best way to invest in the stock market is by opening a Roth IRA account. Although you can open other IRA and brokerage accounts, a Roth IRA account is ideal when investing in the stock market. This is because the profits earned from investments cannot be taxed in a Roth IRA as the money invested in the account were after-tax dollars, meaning that the government cannot tax you again.


If you are unsure of what to invest in the stock market, some banks have a Robo advisor on their website that provides financial advice to the customers based on mathematical calculations and algorithms. However, because the stock market can be unpredictable, it is essential to do your research before investing. One example of how the stock market can be unpredictable is the global housing crisis in 2008, which caused a global economic meltdown. 


These crises indicate that the stock market usually increases in the long run, but it may experience years where the market, in general, loses money. Thus, it is vital to consider this when determining how much you will invest.


A rule of thumb would be to use your income to pay off any living expenses and build up your emergency fund, which is equivalent to three to six months worth of living expenses. Afterward, whatever money is left over, keep a portion for yourself to spend on something you wish to purchase, and the rest should be invested. Never invest money that needs to be used elsewhere as it could result in times of financial difficulty. 


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Inflation will occur annually, and its rate will vary each year. Thus, it is important to take steps to beat inflation and ensure the value of your money does not decrease in the future. In addition, partaking in the steps mentioned above makes it easier to grow your money without inflation affecting it.


What other ways can you increase your wealth without letting inflation get in the way? Let us know in the comments below.


Main Image Credit: Shutterstock.com

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