Cha-ching. Cha-ching. Cha-ching.
Do you hear that sound? If you listen closely, you can hear the extra money you’re spending on consumer goods.
While it’s unlikely that most items ever decrease in price over time, the current rate of inflation that the U.S. economy is experiencing right now is the biggest since 2018. According to the U.S. Labor Department, consumer prices increased about 0.2 percent last month, bringing the Consumer Price Index (CPI) up by about 0.25 percent in January. Furthermore, over the last year, the CPI increased by about 2.3 percent.
What does this all mean? It means that you’re likely paying more — or will soon pay more — for the likes of rent, clothing and other goods. This data supports the Federal Reserve’s projection that overall inflation will eventually hit its 2 percent target this year.
“So what?” you say, “Why does this matter?” you ask. It’s pretty simple. Inflation is inevitable. Just compare the price of gas 30 years ago to what it is today. Yet, it’s the Fed’s job to keep prices in check and monitor the pace of pricing changes in various goods and services. When inflation was low in 2019, the Fed reacted by cutting interest rates in an effort to stimulate more economic activity. In times where inflation is high, the opposite is likely to happen.
Another reason why this matters is because when the price of the things you need to live increase, it’s obvious that your hard-earned money won’t stretch as far. In other words, if that grocery bill seems higher or your rent increases, it’s no coincidence. Essentially, the greater the inflation rate, the less your money can buy.
But the inflation rate can have some positive as well. For example, many employers use the inflation rate as a benchmark of sorts for annual raises or cost of living increases. So while you may be paying more for goods, a bump in salary can help offset this (or in many cases exceed the current inflation rate).
Finally, inflation can offer a great opportunity to invest. We always stress the importance of never putting all of your eggs in one basket, and a healthy inflation rate can be that extra nudge for consumers to invest some of their money. Why? Not only is investing arguably the best way to grow your wealth and expand your portfolio, but doing so can actually help grow your savings faster than the current rate of inflation. Noting the uptick in the inflation rate and the projections moving forward, the present poses a great opportunity to invest.
Inflation is important for the overall economy when it comes to the unemployment rate, price stability and interest rates. Trust the Fed when it says that the economy is currently very, very strong — just be sure to use it to your advantage.