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How the Inflation Rate Impacts Your Wallet and Savings

How the Inflation Rate Impacts Your Wallet and Savings

January 05, 2024935 view(s)
  • Inflation, a rise in everyday prices, can diminish your spending power when incomes don't keep pace.
  • Different stock types perform differently in varying inflation rates; value stocks tend to outperform during high inflation, while growth stocks fare better in low to normal rates.
  • Diversifying investments, considering assets that maintain or increase value (like gold or real estate), and maintaining a flexible budget can help hedge against inflation's effects.

Do you worry about rising inflation and whether it will affect your finances? Unfortunately, inflation can affect any one of us, regardless of income level.

In times of financial uncertainty, people look for ways to protect their finances against inflation. It's important to understand how inflation impacts the economy, your savings, and your investments.

If you're worried about the rising inflation rate and how to protect your wealth, we can help.

Here's a look at the potential impact of inflation on your wallet and what you can do about it.

What Is Inflation?

Inflation is a continuous rise in the prices of everyday goods and services. The well-known method for how to measure inflation is the Consumer Price Index (CPI).

Rising inflation becomes an issue when your income doesn't rise at the same rate. When your money doesn't go as far as it used to, you have less spending power.

For example, when you pay 10% more than you used to pay for milk, coffee, gas, or any product, that's an example of inflation. If your income has also increased by 10%, this price increase may not affect you.

When prices rise, but your income doesn't, inflation begins to have an impact on your personal finances.

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Different Types of Inflation 

When you think about inflation, you may associate it with the cost of living or the consumer price index. Inflation does affect both, but there are other types of inflation too. Each one affects the economy in a different way.

Demand-Pull Inflation

This type of inflation occurs when the demand for goods and services is greater than the supply. When this occurs, it can lead to higher prices and wage growth as businesses attempt to keep up with consumer demand.

Cost-Push Inflation

Cost-push inflation occurs when the price of inputs rises faster than the selling prices of the actual products. This causes consumer prices to rise and can result in decreased profits for businesses.

Built-In Inflation

This type of inflation is driven by the expectations for future price increases. Built-in inflation leads to increased interest rates as consumers and businesses anticipate higher inflation pressures in the future.

Although all types of inflation can have a negative impact, they can also stimulate economic growth.


Inflation and Investment Returns 

To understand how inflation can impact your investment returns, you need to understand the difference between nominal and real interest rates. Here's the difference:


The Nominal Interest Rate

This is the rate without an adjustment for inflation. You would only earn this rate if inflation was at zero.


The Real Interest Rate

This is the nominal interest rate minus the inflation rate. The real interest rate does account for inflation and shows any gains or losses in purchasing power.

Nominal interest rates have to keep up with or outpace the rate of inflation for investors to earn real returns. Investments with lower interest rates are more negatively impacted by the effects of rising inflation.

Impact of Inflation

Inflation will not only impact your investments. When inflation happens, it can be felt all across the fiancial landscape. Here are just a few areas that will feel the full brunt of inflation. 

Inflation and Savings

Inflation can impact your savings even when you keep your money in a savings account with an average rate of interest. Inflation can affect your retirement savings.

In a perfect world, your income should be keeping up with inflation. When you have to live off your savings, inflation decreases your buying power.

It's a good idea to monitor your savings and the inflation rate. You want your assets to carry you through your golden years of retirement.

For example, if you will need $45,000 a year to maintain your lifestyle after retirement, and the inflation rate is 3%, you would need $109,000 a year to maintain your buying power in 30 years.


Inflation and Stocks

In theory, a company's earnings and profits should increase along with the inflation rate. This means stock prices should rise as the prices of goods increase. 

Similar to fixed-income inflation, high inflation will negatively impact nominal returns. For example, if you have a return of 5% but inflation is 6%, your return is negative.

Value stocks are those investors believe are undervalued by the market. These stocks often perform better than growth stocks when inflation rates are high.

Growth stocks are viewed as undervalued by investors. They tend to perform better when the inflation rate is low to normal. 

Inflation and Fixed Income Investments

Inflation can reduce returns on fixed-income investments, including treasuries, CDs, and corporate and municipal bonds. Investors often buy securities for a safe income stream from interest payments. 

Since the income stream remains steady on most fixed-income securities until maturity, the purchasing power declines due to rising inflation. For this reason, bond prices typically fall as inflation increases.


Protecting Yourself Against the Effects of Inflation

Inflation steals the value of your income, savings, and investments. It raises the cost of living and erodes your buying power. There are ways you can protect yourself from the negative effects of rising inflation. One way is to choose assets that maintain or increase their value over time. This may include investing in stocks, real estate, or securities. Buying gold, silver, and other commodities can serve as a hedge against inflation.

You can use cash for some purchases instead of credit cards. This ensures you won't pay interest on your day-to-day purchases.

Finally, be sure to maintain a flexible budget. Inflation leads to higher prices, so you want to be prepared to adjust your budget as needed. 

Things to Do When Inflation Rates Are High

If you're like most people, you probably don't have time to sit around worrying about inflation rates. But when inflation rates go up, it can have a big impact on your life.

Here are some things you can do to cope when the inflation rate goes up:

  • Understand what inflation is
  • Make informed decisions about spending
  • Watch the prices of your frequent purchases
  • Wait for sales or buy in bulk
  • Invest in things that hold their value over time like real estate 
  • Buy gold and precious metals as an inflation hedge
  • Save your money to weather high inflation and maintain your lifestyle 
  • Stay informed about events that could affect inflation rates

Tips for a Comfortable Life When Inflation Rates Are High

Inflation can make it hard to live a comfortable lifestyle, especially if your income isn't keeping up with rising prices. Some tips that may help include:

  • Live below your means and practice delayed gratification
  • Diversify your income with alternative assets like gold and silver
  • Keep track of where your money is going
  • Look for ways to cut unnecessary expenses
  • Invest in things that stand the test of time like precious metals
  • Don't panic and make smart decisions 

Inflationary pressures can be stressful, but you don't want to make rash or reckless financial decisions. This will only make the problem worse.

It can be easy to let financial strain lead to financial recklessness, but you don't have to do that. Instead, try to stay calm and collected and make wise decisions to help you weather the storm of inflation to come out ahead.

Gold Investments as a Store of Value

High inflation can result in detrimental effects on your savings and investments. Inflation tends to erode the value of the dollar and lower the standard of living for average citizens.

Gold has been a stable investment for thousands of years. Its enduring beauty and scarcity have marked it as a symbol of wealth and a reliable form of currency throughout history. 

Historical data offers evidence that gold performs well during high inflation periods. It has kept its value and even appreciated in value when other assets depreciated.

Gold Has Intrinsic Value 

Gold has intrinsic value due to its unique physical attributes. Gold isn't reliant on a company or government, making it dependable during times of economic uncertainty.

Gold Is in Limited Supply

The gold supply is finite. It cannot be easily created like paper currency. The scarcity of gold adds to its appeal as a hedge against inflation.

Gold Has Global Acceptance

Gold is revered worldwide as a wise investment. Gold is accepted around the world and can be easily bought, sold, or traded. This makes gold a highly liquid asset.

In uncertain economic times, gold has demonstrated its versatility and ability to preserve wealth. The intrinsic value of gold, along with its limited supply and global acceptance, make it a popular investment choice for investors.

The Inflation Rate and Your Money

Although inflation can be beneficial to the economy, it can have a negative effect on your savings, investments, and purchasing power. Fortunately, there are things you can do to preserve your money when the inflation rate is higher than usual.

One investment that's always a good idea is gold. Gold has universal appeal and enduring value. It can stand the test of time.

Whether you're thinking of buying gold for the first time or are simply hoping to add to your precious metals collection, the U.S. Gold Bureau is here to assist you. Our precious metals experts are committed to helping you make smart financial decisions to benefit your life now and in the future.

Please enjoy our gift to you, our free investor's guide to gold and precious metals.

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