Inflation is the increase in the prices of goods and services over time. The current inflation rate is 8.6%. When the inflation rate is high, you'll spend more money on buying goods and services. Therefore, inflation leads to an increase in the cost of living.
Higher interest rates can mean more money in your savings, but it can also have a dramatic impact on your cost of living. Keep reading to learn the basics of inflation and how it affects you.
1. Higher Cost of Goods
During times of inflation, the price of items goes up. Necessities like gasoline, food, and utilities cost more with increasing inflation. It will be hard to keep up with the prices if your income remains the same. You'll be left with less money to save or use for discretionary spending. You'll be forced to buy less, opt for substitutes, and look for bargains.
2. Less Income to Spend
Keeping up with the increased cost of living will be hard when your paycheck remains the same. In the first quarter of 2022, the median weekly earnings were $1,037. However, this 4.9% increase from 2021 is eclipsed by the current 8.6% inflation rate.
3. Increased Borrowing Costs
With high inflation, interest rates for loans like mortgages, car loans, and student loans go up. If the interest rates are low, people will borrow more, which will encourage spending which can boost inflation. As such, central banks raise interest rates to encourage people to save more and spend less.
4. Hoarding of Goods
During a hyperinflation period, many people hoard goods, anticipating that the price of the goods will keep increasing in the future. Hoarding leads to shortages of household goods, which means you'll find more empty shelves when you shop.
When you have an understanding of how inflation works, you'll make informed decisions. It's important to work with a financial professional who is a member of the National Association of Insurance and Financial Advisors (NAIFA). Use our Find an Advisor tool to connect with a financial advisor to help you navigate the current inflation economy with confidence.