All About Inflation

All it takes is a weekly trip to the supermarket or your favorite department store to know that, after several years of low inflation, the purchasing power of your money has declined significantly.

The CPI

The Bureau of Labor Statistics (BLS) measures inflation by monitoring the Consumer Price Index (CPI). The CPI tracks the average price of a “basket” of goods and services in eight major categories: food, housing, apparel, transportation, health care, education, communication, recreation and other goods and services.

How It Happens

Inflation occurs when prices go up and the dollar’s purchasing power goes down. An increase in demand or a decrease in supply fuels inflation. Manufacturing and supply chain issues over the past couple of years have contributed to shortages of certain materials, resulting in higher production costs. As production costs rise, so do prices.

Inflation’s Impact

Mild inflation can be good for the economy, since consumers tend to spend money, rather than put off purchases for later. But when inflation escalates and takes hold, prices rise and consumers stop spending.

The Federal Reserve raises interest rates to help tame inflation. As rates increase, people who have variable interest rate debt, such as credit card debt, adjustable-rate mortgages, and home equity loans or lines of credit, will pay more.

Inflation and Investments

Some assets, including Treasury Inflation Protected Securities (TIPS), floating-rate bonds, real estate, and certain stocks and commodities, may provide a hedge against inflation. Stock prices often rise as companies adjust to meet higher supply chain and production costs. However, stocks may experience increased volatility and price fluctuation.

Inflation and Retirement Savings

Current retirees are likely to see the value of their pensions and savings decline as inflation increases. They’ll spend more of their income to pay for the same lifestyle they’re used to. People who are still working and saving for retirement will need to set aside more money in their retirement accounts, as the amount they’ll need to save for a comfortable lifestyle keeps increasing. Consult your financial professional for help determining a new savings target.