How does inflation actually work? Why does it matter?

Inflation is the rise in prices over time, which reduces your purchasing power. It means the same dollar buys less than it did before. For instance, if a gallon of milk cost $3 last year and now it’s $3.50, that 50-cent increase reflects inflation. As prices go up, the value of your savings and income may not keep pace.

Why Inflation Happens

Several factors contribute to inflation:

• Too much money in the economy chasing too few goods.
• Rising production costs, such as labor, wages, and materials.
• High demand outpacing supply for goods and services.

Who Feels Inflation the Most?

Inflation impacts everyone differently:

• Younger families often feel the pinch on everyday goods like food and clothing.
• Retirees may feel it most when making large purchases on a fixed income, such as buying a new car.

Why It Matters

Inflation erodes the real value of your savings and income:

• Your money doesn’t go as far in the future.
• Fixed-income individuals may struggle as prices increase, but their income stays the same.
• It affects interest rates, when inflation rises, the Fed often raises rates, increasing the cost of borrowing.

How to Protect Yourself

While you can’t stop inflation, you can shield yourself from its effects:

Day-to-Day Adjustments

• Track your spending and stick to a budget.
• Eliminate wasteful expenses and subscription creep.
• Shop smart, buy in bulk, negotiate services, and compare insurance or big-ticket items.

Strategic Financial Moves

• Invest in growth assets: Historically, stocks and real estate outpace inflation.
• Avoid long-term cash hoarding: Seek high-yield savings options for your emergency fund.
• Diversify your portfolio: Spread investments across asset classes.
• Invest in yourself: Education and certifications can lead to higher income over time.
• Maximize retirement savings: Pay yourself first through contributions to your 401(k) and other retirement vehicles.

Managing Inflation

You can’t control inflation, but you can take proactive steps to manage its impact. Being disciplined with your money, investing wisely, and staying diversified are key ways to maintain financial stability even when prices rise.