The Federal Reserve is ready for a change. So they’re doubling down on a new POV on inflation. Now, they say it’s cool if it runs slightly higher than their normal target, especially if it balances out a recent period of low inflation. (Around 2% is the sweet spot to keep businesses growing and consumers spending.)
In the past, inflation has gone up when interest rates stayed low like they are now. Because more consumer spending = higher demand, which can push prices higher. Typically, the Fed raises rates to keep inflation from getting out of control. But they’re thinking that the policy shift could give the economy more of the help it needs right now.
Here’s what rising inflation can mean for your wallet.
Bad news for gamers and avocado fans. Inflation doesn’t just mean ‘made in America’ stuff costs more. When the US dollar doesn’t stretch as far as it used to, imports can get more expensive, too. Psst...we get a lot of stuff from other countries, like video game consoles from China and avocados from Mexico.
You have a really good reason to invest. Inflation means any money sitting in a checking or savings account is worth less than it used to be. Take that as a friendly reminder to start investing. Historically, the S&P 500 (an index that’s considered a benchmark for the wider market) has gained an avg of about 10% per year. Which is a LOT more than inflation will take away.
It could make paying off debt less painful. For example: if you have a fixed-rate mortgage, higher inflation won’t change the amount you owe. But if $1,000 today is worth less than it was yesterday, it might feel like you’re paying less (assuming your paycheck has grown at least at the rate of inflation).
theSkimm: The Fed’s adopting a ‘stress less’ attitude toward rising inflation. That can be good for businesses and the economy overall. But maybe not so much for your wallet in the short term. You might want to leave some wiggle room in your budget. And look into investing. Over time, it can help you beat inflation at its own game and grow your money.
Skimm'd by: Ivana Pino, Elizabeth Smith, and Elyse Steinhaus
It influences what you pay to borrow money and more.
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