Gottier Investments

860-683-1245

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.

 

Related Content

Password Protection Strategies

Password Protection Strategies

Simple steps may help you foil hackers and protect your privacy.

Protecting Your Business from the Loss of a Key Person

Protecting Your Business from the Loss of a Key Person

Business owners may be able to protect themselves from the financial consequences of losing a key employee.

Finding the Balance

Finding the Balance

The sandwich generation faces unique challenges. For many, meeting needs is a matter of finding a balance.

 

Have A Question About This Topic?







Thank you! Oops!

Variable Universal Life Insurance

Variable Universal Life is permanent insurance in which the policyholder directs how premiums are invested.

Insurance Needs Assessment: For Empty Nesters and Retirees

Do your insurance needs stay the same when the nest empties?

Earnings for All Seasons

Earnings season can move markets. What is it and why is it important?

View all articles

Bi-Weekly Payments

This calculator estimates the savings from paying a mortgage bi-weekly instead of monthly.

Lifetime of Earnings

Estimate how much you have the potential to earn during your working years.

Federal Income Tax

Use this calculator to estimate your income tax liability along with average and marginal tax rates.

View all calculators

5 Smart Investing Principles

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

Principles of Preserving Wealth

How federal estate taxes work, plus estate management documents and tactics.

Your Cash Flow Statement

A presentation about managing money: using it, saving it, and even getting credit.

View all presentations

Acres of Diamonds

In life it often happens that the answers to our most pressing questions are right in our own backyards.

It May Be Time for a Financial Checkup

It’s never a bad time to speak with your financial professional about changes in your situation.

Questions to Consider When Buying a Vacation Home

Doing your research is key before buying a vacation home.

View all videos