What to Do About Inflation’s Impact on Your Finances

By Craig Lemoine, Director of Consumer Investment Research


Suppose last year you went grocery shopping and filled your cart with $100 worth of items. This year, you went to the same store and bought the same items – this time, the bill rang up at $107.50.  

The difference of $7.50 represents an increase in average consumer goods and services. Divided by the original period ($100), it illustrates a 7.5% inflation rate 

Inflation is the loss in purchasing power due to the increase in costs of goods and services in an economy. The Federal Reserve’s long term inflation target is 2%, allowing for some years of lower consumer inflation and some years of higher inflation. When inflation surges, the Federal Reserve has tools to help cool off the economy, including raising interest rates and selling treasury notes. Both tools are intended to raise the cost of borrowing, causing businesses and local governments to spend less, effectively turning a release valve on inflation pressure. 

Inflation is a lagging indicator. Traditionally, inflation lags real gross domestic product growth and economic recoveries. When America reaches full employment, wages rise higher. Higher wages coupled with greater spending power traditionally push prices upward. Historically, inflation has followed our economy returning to health.  

In the United States, inflation is measured through the Consumer Price Index. The CPI measures the difference in what we pay for goods and services over time and is reported monthly.  

The CPI is weighted based on an average urban household, which may be different than inflation experienced by a particular person. For example, a retiree may consume more medical care and less education than an average family, creating a unique inflation rate for that family. CPI provides a reference point for inflation but is not absolute across all consumers.  

Inflation leads to a reduction in spending power over time. If 20 years ago an apple cost 50 cents, the same piece of fruit would cost $1.32 today.  

Different Types of Inflation

Inflation takes many different forms, some more potentially devastating than others.  

  • Transitory Inflation is temporary inflation, caused by a spike, bottleneck or rush on a commodity or consumer good. Transitory inflation may be the result of political pressure and global conflict, which will resolve as the conflict ends or supply chains reemerge.  
  • Hyperinflation is a worst-case inflation scenario. Hyperinflation is a product of loss of confidence in a country’s central currency. In the 1920s, Germany experienced a 30,000% monthly inflation rate, as the world devalued the German Mark.  
  • Stagflation occurs when prolonged price growth exceeds real GDP growth. Stagflation is challenging because traditional tools to fight inflation – such as increasing the discount rate – lead to higher unemployment. The United States saw a period of stagflation in the late 1970s.  
  • Deflation occurs when prices drop. Price drops may be the result of a recession, where demand falls consistently over time. Deflation tends to occur by sector and is often transitory.  
  • Creeping inflation is a term generally used to describe prices increasing 0-3% annually. Consumers may not notice these price increases that often keep up with wage growth.  
  • Walking inflation is a term generally used to describe prices increasing 3-10% annually. Consumers may hoard inelastic goods, raising prices further. A combination of rationing, monetary and fiscal policy may be needed to combat walking inflation.  
  • Core inflation measures the rise in prices except for food and energy. Food and energy tend to be more volatile and removing those elements from an inflation calculation provides a steadier growth rate.  

Tips to Beat Inflation  

Inflation is particularly troubling when prices rise higher and faster than wages. When rent, food and transportation costs exceed wage growth, inflation becomes painful.   

  • Consider your investments. Historically, precious metals, commodities, large-company “blue chip” stocks, I-bonds and real estate investment trusts (REITs) securities have held their value better than riskier assets during higher inflationary periods. Bond values tend to fall when interest rates rise, though their yields increase. Talking with an investment adviser will help you develop a portfolio that considers inflationary pressure in line with your financial goals.  
  • Review your budget and personal spending. Inflation gives families a great opportunity to sit down and talk about budgets. Are there streaming or subscription services you no longer use? Can you change your ratio between groceries, takeout and meal kits? Shave off ancillary costs where you can.  
  • Get strategic with your emergency fund. Financial planners tend to recommend keeping three to six months in savings to help protect from unemployment or other unforeseen costs. This can be tricky when the average interest paid on savings accounts remains less than 1.0%. i As you skim down your budget, you should be able to recalculate your emergency fund. Also consider laddering CDs or I-Bonds for a portion of your emergency fund. Talk with your financial adviser about building a custom plan for your emergency fund.  
  • Revisit your financial goals. Meet with a financial planner to talk about college savings, your retirement or other long-term goals. Cost shocks may create a need to adjust your savings and spending goals.  

Inflation is disruptive to even the best laid plans. It is the true enemy of retirement planning and requires thoughtful strategies and a well-rounded portfolio. Meeting with an experienced financial professional can help you develop a plan to keep your goals on track. 

Schedule a strategy session with a member of our team to start the conversation. 

Craig is not affiliated or registered with Cetera Advisor Networks LLC. Any information provided by Craig is in no way related to Cetera Advisor Networks LLC or its registered representatives.

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