What You Need to Know About the Effects of Inflation

We don’t have to tell you how inflation affects you. 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. It’s not your imagination: Prices keep rising, and the impact of inflation on consumers is felt in our wallets and bank accounts.

There is a relationship between inflation and the cost of living. Here, we’ll talk about what inflation is and the effects it can have on your daily spending habits.

If you want to talk to an agent about how to adjust or rethink your strategies in times of inflation, reach out to Farm Bureau.

What Is Inflation?

The word “inflation” is commonly used to describe the rising prices of goods and services. In brief, when inflation is occurring in the economy, it costs more money to receive the same products or services, which means you get less bang for your buck. 

Inflation isn’t new or uncommon, but the rate of inflation over the past few years has been higher than average levels — an annual increase around 2% is considered “normal.” There’s no single cause for this: Many factors contribute to increasing prices. An overall increase in demand for goods and services paired with worker shortages, taxes on importing and supply chain issues all drive higher rates of inflation.

But the main issue, from most people’s perspectives, is that inflation means things like food, building materials (and thus houses), computers, gas and everyday items have gotten more expensive.

How Can Inflation Impact Your Budget?

It’s clear why inflation would affect your household budget. For those on already tight budgets, inflation can be a real problem, causing people to have to scrimp and pinch to make ends meet. 

Rising costs for housing, food, gasoline and energy can hit wallets hard — especially for Americans still recovering financially from pandemic implications, job loss or natural disasters, as well as for those who rely heavily on a fixed income or Social Security.

How Can a Budget Help You Adjust With Inflation?

Budgeting can help you see where your money is going and identify areas that can be adjusted. When creating a budget or making adjustments, factoring in a rate of inflation for items likely impacted — food, clothing, gas, energy costs – can give you a better picture of what your budget forecast looks like. Assigning priorities as your budgeting can help identify which expenditures you might be able to reduce.

How Can You Make Your Money Go Farther?

When costs are on the rise, many people look for new ways to get what they need. Some examples include purchasing cheaper alternatives, like store brands; couponing, finding discount codes or shopping around for items like gas. Popular suggestions to save money around the house include meal planning and using re-usable items rather than consumable ones (like rags instead of paper towels). 

It may be a good time to 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?  

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.

When it comes to fixed income investments like certificates of deposit (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.

For example, investments with fixed, long-term cash flows, like U.S. Treasury Bonds, 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. Check with your agent or financial advisor to find the right investments for you.

How Can Thinking Ahead Help You Weather Inflation?

While no one wants to pay more for goods and services, inflation is something everyone must prepare for. There are ways to try to combat it in your day-to-day but inflation becomes particularly worrisome as you’re looking further into the future, such as at retirement. Connect with Farm Bureau to talk with an agent about ensuring your long-term investment strategy properly plans for rising inflation.