Investment Read Time: 3 min

Inflation & Your Money

"If the current annual inflation rate is 7.9 percent, why do my bills seem like they're 10 percent higher than last year?"1

Many of us ask ourselves that question, and it illustrates the importance of understanding how inflation is reported and how it can affect investments.

What Is Inflation?

Inflation is defined as an upward movement in the average level of prices. Each month, the Bureau of Labor Statistics releases a report called the Consumer Price Index (CPI) to track these fluctuations. It was developed from detailed expenditure information provided by families and individuals on purchases made in the following categories: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other groups and services.2

How Applicable Is the CPI?

While it's the commonly used indicator of inflation, the CPI has come under scrutiny. For example, the CPI rose 7.9 percent for the 12-months ending in February 2022. However, a closer look at the report shows movement in prices on a more detailed level. Energy prices, for example, rose 25.6 percent during those 12 months.1

Are Investments Affected by Inflation?

They sure are. As inflation rises and falls, three notable effects are observed.

First, inflation reduces the real rate of return on investments. So, if an investment earned 6 percent for a 12-month period and inflation averaged 1.5 percent over that time, the investment's real rate of return would have been 4.5 percent. If taxes are considered, the real rate of return may be reduced even further.3

Second, inflation puts purchasing power at risk. When prices rise, a fixed amount of money has the power to purchase fewer and fewer goods.

Third, inflation can influence the actions of the Federal Reserve. If the Fed wants to control inflation, it has various methods for reducing the amount of money in circulation. Hypothetically, a smaller supply of money would lead to less spending, which may lead to lower prices and lower inflation.

Empower Yourself with a Trusted Professional

When inflation is low, it's easy to overlook how rising prices are affecting a household budget. On the other hand, when inflation is high, it may be tempting to make more sweeping changes in response to increasing prices. The best approach may be to reach out to your financial professional to help you develop a sound investment strategy that takes both possible scenarios into account.

1. USInflationCalculator.com, 2022
2. BLS.gov, 2022
3. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Past performance does not guarantee future results.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |

Free Retirement Guide

It's never too soon to start preparing for retirement. But do you know what to look out for? Download our free ebook, "Retire Happy: A Simple Guide to Your Next Big Adventure."



Thank you! Oops!
 

Related Content

The Cycle of Investing

The Cycle of Investing

Understanding the cycle of investing may help you avoid easy pitfalls.

What’s Your Investment IQ?

What’s Your Investment IQ?

You make decisions for your portfolio, but how much do you really know about the products you buy? Try this quiz

5 Smart Investing Principles

5 Smart Investing Principles

Principles that can help create a portfolio designed to pursue investment goals.

 

Have A Question About This Topic?







Thank you! Oops!

A Taxing Story: Capital Gains and Losses

Understanding how capital gains are taxed may help you refine your investment strategies.

Risk Perspective

Is it possible to avoid loss? Not entirely, but you can attempt to manage risk.

Do Our Biases Affect Our Financial Choices?

Even the most seasoned investors have biases affecting their financial choices.

View all articles

What Is My Risk Tolerance?

This questionnaire will help determine your tolerance for investment risk.

Impact of Taxes and Inflation

Estimate the potential impact taxes and inflation can have on the purchasing power of an investment.

What Is the Dividend Yield?

This calculator helps determine your pre-tax and after-tax dividend yield on a particular stock.

View all calculators

5 Smart Investing Strategies

There are some smart strategies that may help you pursue your investment objectives

5 Smart Investing Principles

Principles that can help create a portfolio designed to pursue investment goals.

View all presentations

16 Wall Street Cliches in 60 Seconds

Pundits say a lot of things about the markets. Let's see if you can keep up.

Bridging the Confidence Gap

In the world of finance, the effects of the "confidence gap" can be especially apparent.

Where Is the Market Headed?

We all know the stock market can be unpredictable. We all want to know, “What’s next for the financial markets?”

View all videos