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 June 2020 to June 2021, the Consumer Price Index (hint: it measures the average price of things like food, clothes, housing, etc.) rose 5.4% – the fastest jump since 2008. 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. Especially ones that took a hit during the pandemic and are now bouncing back. Think: airfare, hotels, restaurants, and gas. But also products that have been in short supply, like semiconductor chips and everything that uses them (read: cars, smartphones, laptops), chlorine, chicken, and oxygen (really).
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.) And the Fed says rate hikes could come as soon as 2023.
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.
Invest. A well-diversified portfolio could help you earn enough to beat inflation. Just don’t make any sudden moves. 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 strategy to match your risk tolerance. Oh, and if you're thinking about investing in commodities to get in on those rising prices, keep in mind experts say they should make up a very small portion of your portfolio since they're considered riskier than other investments.
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