The year 2021 has brought a lot of changes to the world – some positive, and some with potentially worrying consequences. One topic heavy on everyone’s mind is inflation, which has risen in some areas at an exponential rate. For example, used vehicle prices rose 10 percent in just 12 months, according to InflationData.com. So how does inflation affect your investments, and what can you do about it?
The first thing we need to address is what inflation actually means. Inflation is defined as an upward movement in the average level of prices (LPL Financial). The Consumer Price Index (CPI) tracks those changes from one month to the next, and the overall percentage is reported by the Bureau of Labor Statistics. The products tracked to determine CPI include food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other groups and services according to the Bureau.
According to this article, there are three considerations when it comes to inflation and investments:
“First, inflation reduces the real rate of return on investments…
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.”
So what is the answer to managing your money in the midst of inflation, which will always be a constant? My best advice is to turn to the experts. We can help determine how these changes will affect your budget from one month to the next, and how they will affect your larger financial outlook over time. It’s best to take a long-term approach to this and any other upheaval in the system, since there will always be fluctuations over time.
Contact me today and let’s talk about how we can manage the ups and downs of inflation – and anything else that might come along!