Inflation is an important economic indicator. It tells you how fast prices are changing in the economy, and it impacts everything from the interest rate on your saving account to your grocery bill.
At 2.1 percent, the current inflation rate in the U.S. is giving some market-watchers the jitters. Should you be concerned, too?
Get the information you need to decide for yourself. Learn how inflation could impact your daily life and how you can better protect yourself from the high cost of inflation with help from America's Gold Authority®, U.S. Money Reserve.
What is inflation?
First off, what is inflation? Inflation is the rate of increase in prices for goods and services in an economy over a period of time. Inflation increases can be measured in a few ways, but are most often measured by the Consumer Price Index (CPI).
The CPI tracks the prices of hundreds of everyday items people normally purchase, from loaves of bread to movie tickets, and reports on their price changes over time.
“If CPI is 3 percent, this means that on average, the price of products and services we buy is 3 percent higher than a year earlier. Or, in other words, we would need to spend 3 percent more to buy the same things we bought 12 months ago,” reports BBC.
You can see inflation at play almost everywhere, even at the butcher. In January 2017, a whole chicken cost $1.42 per pound, on average, reports the U.S. Department of Labor, Bureau of Statistics. Fast forward a year to January 2018 and the same chicken cost $1.51 per pound. That's an increase of $0.09 or 6.3 percent.
That doesn’t mean the rate of inflation is 6.3 percent. The chicken is just one part of the equation! The Bureau of Statistics looks at pricing data for thousands of items across the U.S. to get the most accurate sampling and account for significant price swings in individual items or locations.
How an inflation increase hurts you
Inflation is typically a bad thing for the average person's wallet, notes The Simple Dollar.
In general, “high inflation decreases purchasing power and undermines the value of money. Low inflation, however, suggests a dramatic collapse in the price of goods, which restricts spending and could trigger deflation and a broader recession,” writes John Rothans, Master Numismatist at U.S. Money Reserve.
Underneath all of the economic lingo, here’s what this could mean for your everyday life.
Inflation weakens your buying power
“In periods of high inflation, your standard of living declines hand-in-hand with your relative purchasing power,” explains Bankrate, especially if your income doesn't increase (or increases at a slower rate) than general inflation.
Your money just doesn't go as far as it used to, and right now, it’s not.
Look at two things many Americans take for granted nowadays: cars and college. Measured in 2015 dollars, the average cost for a public four-year college in the 1975–76 school year was $2,387, compared to today’s $9,410 per year. The real cost to attend college has more than tripled, calculates The Penny Hoarder. And cars? In 1976 the average midsize car might cost you $3,700. In 2015, the least expensive midsize car costs over $16,000—an increase of over 300 percent.
Inflation means you can expect to shell out more money for relatively the same results.
Inflation means you have less money left over
“Higher food, gasoline, and utility costs mean less money remains once these necessities are paid for, leaving little for savings or discretionary spending,” writes Investopedia.
To compensate for the rise in prices, you may find yourself buying less, switching to cheaper substitutes, or driving farther to find bargains.
Inflation complicates retirement
If the past is any indicator of the future, you can expect to be paying more, not less, in retirement to maintain the same standard of living that you have today.
Inflation does more than erode your purchasing power. It's also a benchmark the federal government uses to determine contribution limits to qualified retirement plans or raise Social Security benefits.
How much could retirees lose to the effects of inflation? LIMRA Secure Retirement Institute constructed a model demonstrating the effect inflation could have on the average Social Security benefit over a period of 20 years. According to its research, a 1 percent inflation rate could swallow up $34,406 of retirees’ benefits.
Use this calculator to see how inflation could impact your retirement income.
Inflation pushes interest rates up
When inflation is high, interest rates on home loans, credit cards, and other loans tend to go up. Overall, this encourages people to spend less. But could this be a good thing for your savings account? Only if your savings account has a higher interest rate than the rate of inflation.
The minimal returns that most of today's money market accounts and savings accounts tend to offer aren't enough to account for inflation, though, so parking your money there is not likely to protect your purchasing power.
What can you do to maintain, if not strengthen, your purchasing power over the long haul?
“Gold can protect against currency weakness and stock market volatility,” says World Gold Council’s Alistair Hewitt. For long-term gold owners in the U.S., “[gold] makes them money: around an average of 10% per annum since 1970.” Make your move into gold today and sign up to receive U.S. Money Reserve’s Free Gold Information Kit!
How to protect yourself from the high cost of inflation
You can better protect yourself from the ravages of inflation by diversifying away from the dollar, buying physical gold, and investing in your own financial literacy.
Diversify away from the dollar
No matter how diverse your portfolio is, you're not truly protected from inflation if all of your assets move in parallel with the dollar.
“Bankrate senior financial analyst Greg McBride says commodity prices track the inflation rate closely. Buying storable commodities such as gold can be a good hedge against inflation.”
Consider diversifying into commodities, foreign asset classes, U.S. companies with offshore profits, natural resources, shares in mining companies, and above all—physical gold. Doing so can help protect you from bubbles in any of these asset classes, not just the dollar.
Buy physical gold
As for gold in particular, “gold is wealth insurance,” says Philip N. Diehl, president of U.S. Money Reserve and former director of the U.S. Mint. “Gold outperforms other asset classes when hard times come and often rises when other assets are crashing. Including gold in your portfolio protects your wealth by offsetting losses in your other assets.”
In the long run, gold returns have outpaced the U.S. CPI, reports the World Gold Council. Gold has not just preserved capital but helped it grow.
As you can see in the chart (below), in years when inflation has been higher than 3 percent, gold's price increased by more than 14 percent, on average.
Invest in yourself
You’re going to have to navigate a variety of risks now and in the years ahead, no matter which direction inflation swings.
One way to keep pace, and even outpace, the rate of inflation is by increasing your earning potential and salary through education and training. Invest in your own knowledge and skills in your professional life, finances, and beyond.
By staying informed and taking steps to educate yourself, you can fight the effects of inflation and make strategic moves that are right for you. Take the first step now, before inflation increases any further. Call 1-844-307-1589 for a one-on-one consultation with an experienced Account Executive and learn how gold can work for you today.