You might have noticed higher totals in your shopping cart recently.
Inflation. That's the general increase in the cost of everyday items. Which leads to a gradual decrease in your money's purchasing power. Because a dollar doesn't stretch as far when things get more expensive. It’s why you have to pay more for a car or home today than your parents did when they were your age.
Many experts say a little inflation is a sign of a healthy economy. The Federal Reserve aims to keep the inflation rate at around 2%. But from May 2020 to May 2021, the Consumer Price Index (hint: it measures the average price of things like food, clothes, housing, etc.) rose to 5% – the fastest jump since 2008. And whether prices will keep rising (and how fast and how long) is still TBD.
A few reasons:
Economic recovery. When the economy starts to pick back up after a downturn (like after a global pandemic), prices tend to go up. Because people are more willing to spend when they have more money (hi, stimulus payments). And corporations raise prices when people are buying more.
Changes in weather. A ton of commodities (aka raw materials) can be negatively impacted if the weather is too cold or dry. That can lead to shortages of goods like corn and wheat. And those added costs trickle down to consumers.
Supply chain disruptions. Producing goods is a process. And if it breaks down anywhere along the line, it can impact how much of a product is available to the public. That can happen when there’s an internal interruption, like a shortage of workers. Or an external interruption, like a major storm that prevents a company from being able to distribute its goods.
A LOT of stuff in just about every spending category. Think: gas, semiconductor chips and everything that uses them (read: cars, laptops, tablets, etc.), chlorine, chicken, diapers, rental cars, plastics, palm oil, tampons, and oxygen (really).
And another big one: lumber. Last year, the Fed lowered interest rates in an effort to support economic recovery. That drove down the cost of mortgages and prompted more Americans to buy homes. Now lumber, which is used to build homes, is scarce because there hasn’t been enough to keep up with the housing boom. So prices have soared. Home prices followed suit.
Certain stock prices. Since commodities represent the basic building blocks of products, their prices affect corporations' operational costs and can cause stock prices to fluctuate.
Another way inflation can affect the stock market: if the Fed thinks inflation is running too hot, it can raise interest rates to discourage consumer spending and keep prices under control. (Reminder: higher interest rates means it's more expensive to borrow money and more attractive to keep your money sitting in a savings account.) The Fed says they're not making any sudden moves, but the possibility still tends to make investors nervous.
Comparison-shop. When prices start going up, it’s important to pay close attention to what you’re buying. If there’s a cheaper option, try swapping out your usual. Your budget says thanks.
Cut your spending. If there are no easy swaps for the products you need, try looking for other ways to cut back so your budget isn’t stretched too thin. Look at all your regular monthly expenses to see what you can live without or downgrade.
Don’t make any sudden moves with your portfolio. You could try investing in commodities to get in on those rising prices. But experts say they should make up a very small portion of your portfolio since they're considered riskier than other investments. And in general, try not to react impulsively to whatever the market does next. Take this time to assess whether you’re comfy with your asset allocation for the long term. If not, it’s time to adjust your portfolio to match your risk tolerance.
Good news: the economy is bouncing back. Bad news: that's one reason prices are going up. And that means big things for your wallet. Understanding the potential impact can help you make smart money moves to deal with inflation.
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Skimm'd by: Ivana Pino, Casey Bond, Stacy Rapacon, and Elyse Steinhaus