How rising inflation can affect your money

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Last month, the U.S. Consumer Price Index, a survey of a variety of products, rose 5% from a year ago. The gain was a little more than expected and the biggest increase since the summer of 2008, according to the Department of Labor.

It makes Wall Street buzz about what inflation means for the markets and the economy. But what does that mean for, you know, normal people? Above all, higher prices.

But first, it’s important to understand what inflation is and where it comes from. Essentially, inflation is the increase in the prices you will pay for goods and services. You will have to spend more to get the same things. A certain level of inflation – about 2% – Is normal.

“While inflation has a negative connotation for many people, inflation itself is not inherently good or bad,” said Jill Fopiano, President and CEO of O’Brien Wealth Partners. “A certain level of inflation is a sign that the economy is healthy.”

Inflation is a hallmark of economic recovery. In the United States right now, he’s being driven by a few overlapping factors resulting from the Covid-19 pandemic: the low interest rates set by the Federal Reserve, several rounds of direct government stimulus to consumers, and to businesses, and pent-up consumer demand unleashed as the United States reopens.

All of this has led to demand exceeding supply, causing shortages and price spikes in product categories. including semiconductor chips, used cars and homes, among others.

“Just 12 months ago, many were even afraid to leave their homes,” says Deron McCoy, chief investment officer at investment advisory firm SEIA. Meaning: People weren’t spending. But now they plan to make up for lost time, because we discussed a few weeks ago.

With this in mind, many economists and other financial experts let’s say the current inflation rate is not worrisome – it is temporary and expected, although it is not clear when it will eventually subside. And today’s increase is nothing compared to the 1970s, when several unique shocks drives inflation to double digits, McCoy says.

However, there will be a sticker shock this summer, McCoy says, as supply chains catch up with consumer needs after the pandemic.

For now, here’s how much higher inflation could cost you and what you should do about it.

Inflation erodes the purchasing power of the average person. Everyone’s true inflation rate is different because we all buy different products and services.

You can expect to pay more for used cars and car rentals, furniture, plane tickets, hotels, and basic necessities like groceries and gasoline. Used car prices are up 29.7% from a year ago, for example, while clothes cost 5.6% more. Housing and renovation supplies are also very high.

“All of this means that your salary does not go as far as it used to be, unless your salaries increase at the same rate, which most people have not,” says Steven Saunders, director and portfolio advisor at Round Table Wealth Management. .

That’s no reason not to spend money, especially after the past 15 months, says Marguerita Cheng, Certified Financial Planner and CEO of Blue Ocean Global Wealth. “You just want to be aware of the price increase.”

With interest rates on savings accounts already hovering just above 0% nationwide, inflation can make your money even less valuable. But that’s no reason to move it, especially your emergency fund, says Cheng.

“Saving is not designed to make you rich,” she says. It is meant to provide a financial cushion if you need it.

That said, if you have more unused money than you need in an emergency fund (experts recommend having three to six months of spending in reserve, sometimes more) then you might consider invest some of it, she said.

It’s impossible to predict how inflation will affect all of your investments, but it will decrease the value of long-term bonds, which typically pay out a fixed income amount each year, says Brian Spinelli, Certified Financial Planner and Senior Wealth Advisor at Halbert. Hargrove. Higher inflation means the fixed amount doesn’t go that far.

Gen Z, Millennial, and Gen X youth investors don’t really need to worry about these short-term impacts, experts say. They should stick to their current investment plan, which is probably heavy on stocks. Stocks can provide a decent hedge against inflation, as they can generate higher returns than inflation.

With that in mind, long-term investors should continue to invest in a broadly diversified portfolio of low-cost equity index funds, says Tony Molina, Chartered Accountant and Senior Product Specialist at Wealthfront. If you have a 401 (k) or IRA invested in a target date fund or other stock index fund, you don’t need to do anything.

“It’s human nature to want to react in times of uncertainty, but it’s best not to get too caught up in the news about inflation,” Molina explains.

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