The other day, I was having an interesting conversation with my grandmother. She was considering replacing her flooring in her home and was literally “floored” with how much the cost had gone up since she installed her last carpet 10 years ago.
It really is fascinating to talk about money with our older generation. We quickly can see that their idea of “a lot of money” is very different from what we consider a large sum of money today. Consider that in 1970, a gallon of gas cost $0.38, the average home was $17,000 and the average household income was just under $9,000. Surely, today you could not live a similar lifestyle on $9,000.
What is Inflation?
Inflation is defined as the price of goods and services increasing over time. Inflation can be caused by many reasons, but two of the most significant reasons are costs of raw materials and labor. Prices of raw material can increase if supply chains are short or during times of disaster. Labor cost can sharply increase due to the job market. If unemployment rates are low, companies will need to increase their wages to attract job seekers. If wages increase, this will give people a little extra to spend. If enough people have extra money to spend, this will ultimately increase demand for goods and services starting the cycle of inflation over again.
Monetary policy can also contribute to inflation. Central banking systems control the flow of money in economies. They will tighten or loosen the flow of money into economies by setting interest rates. Recently home prices have surged in the United States in response to record low interest rates. These low rates made homes more affordable for first-time buyers and allowed current homeowners to sell at a premium and upgrade their current homes. This increased demand for homes and drove prices up. It is likely that as rates increase, the market will slow again and prices will stabilize.
While some things inflate faster than others, one thing is for certain. Your current lifestyle will not cost the same when you are ready to retire. It can be daunting to think about how much your lifestyle will cost in 10, 20, or even 50 years. The average long-term inflation rate in the US is 3.1%. There have been times in our history when inflation has been much higher. In the late 1970s and early 1980s inflation soared to double digit rates. Inflation raged again in 2021 and continues to increase prices on goods and services.
If your savings nest egg is growing less than the rate of inflation, you are losing your purchasing power. Therefore, it is very important not only to save for your financial future, but also to have an investment strategy that will outpace inflation. A solid financial plan can allow you to evaluate how your current savings strategy will stand up to inflation. Talk with a trusted advisor today to review your strategy and determine the potential effects of inflation.
Investment Advisor Representative
Rebecca joined the firm in 2011 as an Investment Advisor Representative. In this role, she works with clients to manage their investment assets and help them obtain their financial objectives. Rebecca brings a great deal of experience to the team having worked for several years at Marshall & IIsley Bank and MetLife. She earned a Masters of Business Administration degree (with an emphasis on finance) from Concordia University.
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