What You Need to Know About the Effects of Inflation

A recent trip to the grocery store or a glance at the cost of fuel at the pump may have left you with sticker shock. According to the U.S. Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers rose 5.4% compared to a year ago. Let’s dive into what inflation is and how it may impact your budget.

What Is Inflation?

Inflation is a common term used to describe the rising prices of goods and services. Essentially, with inflation, you’ll spend more money to receive the same products or services – weakening your purchasing power. So, why all the talk about inflation?

Inflation isn’t new or uncommon, but the current rate of inflation is higher than average levels — an annual increase around 2% is considered “normal.” A moderate amount of inflation can be a sign of economic growth. Inflation isn’t caused by one thing, rather many factors contribute to increasing prices. For example, an overall increase in demand for goods and services paired with worker shortages and supply chain issues has driven higher rates of inflation.

How Can Inflation Impact Your Budget?

The impact of inflation on personal finance affects individual budgets in different ways and at different times. For already tight budgets, inflation can quickly bust them. Rising costs for housing, food, gasoline and energy hit wallets hard — especially for Americans still recovering financially from pandemic implications and those who rely heavily on a fixed income or Social Security.

How Can a Budget Help You Adjust with Inflation?

If you aren’t currently following a budget, now’s a great time to start – and stick with it. When creating a budget or making adjustments to your current plan, be sure to factor in a rate of inflation for items likely impacted — food, clothing, gas, energy costs, etc. Assign priorities for your budget. Doing so can help identify which expenditures can be reduced.

How Can You Make Your Money Go Farther?

When costs are on the rise, it’s a good time to find new ways to get what you need — and within your budget. There may be cheaper alternatives like store brands for the essentials or keeping an eye on where you can buy the same product for a smaller cost – such as gasoline. Couponing is another way to bank savings. Review personal finance basics and take a hard look at your budget. What things can be cut? What can you do at home instead of paying for? Are you spending $5 or more a day on a latte instead of making coffee at home?

How Can Inflation Impact Your Individual Investments?

Over time inflation can chip away at the returns on your investments. The impact of inflation on your investments may vary based on the types of assets you own.

For example, investments with fixed, long-term cash flows typically won’t perform as well when inflation is on the rise. However, assets with variable cash flows such as real estate may do better when there’s increasing inflation.

When it comes to fixed income investments like certificate of deposits (CDs), the purchasing power of the interest earned decreases as inflation rises. But historically, stocks tend to rise to a certain extent with rising inflation. Diversification of your portfolio is one way to help protect your money against inflation.

How Can a Financial Plan Help You Weather Inflation?

While no one wants to pay more for goods and services, inflation is something everyone must prepare for, but a little planning can help you manage it. Creating a comprehensive plan and reviewing it regularly with a financial advisor can help ensure your long-term strategy properly plans for rising inflation. Connect with a Farm Bureau financial advisor to review your financial needs and create a strategy for reaching your financial goals.