What to Do with Inflation
Inflation is when prices go up. To be more precise, the International Monetary Fund defines it this way: “Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.” While many measures of economic activity can seem abstract and far removed from everyday life, inflation affects all of us in ways we can’t ignore.
Inflation has been running at rates not seen since the early 1980s. This recent increase is certainly higher than expected, especially in the wake of the Federal Reserve’s aggressive move to raise interest rates.
Economists agree that there are three major factors contributing to high inflation:
In the first year of the pandemic, while manufacturers were cutting back production in anticipation of an economic slowdown, consumers were given trillions of additional dollars. When you have more money chasing fewer goods, prices tend to go up. This imbalance is just finally working itself out.
A rise in wages causes prices to go up. Unemployment is at a record low and companies have had to raise wages to attract good workers.
The rising cost of debt causes prices to increase. For more than a decade, rates were stable and low. But as the Federal Reserve raises rates, the cost of borrowing will rise, putting pressure on public budgets and forcing businesses to pass along these higher costs.
Knowing that higher-than-usual inflation may be around for a while, what should you do?
As always, control what you can control. That means adjusting your spending habits, if necessary, to keep in line with your budget.
Continue working toward your long-term goals. Ever heard banks aren’t safe? Inflation is why. Keeping money in bank accounts and Treasuries is a surefire way to stay behind inflation and lose money. Instead, work with your Financial Advisor to find an investment strategy that can keep up with inflation at the risk level (percentage of stocks versus bonds) you are comfortable with.
Don’t worry about what you can’t control. Often, what we worry most about are future events that are mere speculation. Meditating on what could go wrong accomplishes nothing, except to take the joy out of life.