If you’ve been watching the news recently, you may have seen financial experts discussing the current bout of inflation. In numerous television interviews, economists spend much time explaining what inflation means for financial markets and the economy in TV interviews.
But what does it mean for ordinary people like you and me? What’s the potential impact of inflation on your finances? Understanding how inflation can affect your savings and investments is the first step to protecting yourself against potential adverse effects.
What is inflation?
Inflation occurs when the buying power of an individual dollar falls as prices increase. You spend more to get the same things you bought before.
More than the cost of living, inflation can impact interest rates on savings accounts, the performance of companies and, in turn, the price of their shares.
The Bureau of Labor Statistics (BLS) is responsible for measuring inflation. To determine the Consumer Price Index (CPI), they track the cost of consumer goods such as food, clothing, automobiles and gasoline over time to estimate the overall rise in the prices.
Some level of inflation (around 2 percent) is a sign that the economy is healthy and is considered normal. The current high inflation in the United States stems from overlapping factors in the wake of the COVID-19 pandemic. These factors include government stimulus packages to both consumers and businesses, low-interest rates set by the Federal Reserve (the nation’s central banking system), and increasing consumer demand as the country reopens amid the easing of pandemic-related restrictions.
Inflation by the numbers
Inflation has been running high for several months now, well above the Federal Reserve’s 2 percent annual target. From groceries and clothing to cars and gas, Americans are digging deeper into their pockets for everyday expenses.
According to the BLS, the inflation rate from August 2020 to August 2021 was about 5.3 percent. The CPI grew by 4.3 percent – slightly more than projected and the largest increase since the summer of 2008.
Depending on the state of the economy, the inflation rate can swing up and down, meaning high inflation can persist longer.
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