When it comes to the economy and investing for the future, inflation is a much talked about, but often misunderstood, subject. Kyle Jones, Financial Planner with Wamhoff Financial Planning & Accounting, shares information to help explain what you need to know about inflation.
- What is inflation?
- The rate at which the general level of prices for goods and services is rising, while purchasing power is falling.
- Essentially, inflation erodes purchasing power over long periods of time.
- Inflation is influenced by the Federal Reserve’s monetary policy, and the Federal Funds Rate which impacts short-term interest rates. Increased rates dampen inflation, improves the strength of the dollar, and removes frothy lending practices which helps moderate growth.
- The US Bureau of Labor Statistics releases inflation data.
- The media typically reports on Core Consumer Price Index (CPI). However, Core CPI does not include price changes in food or energy.
- Although food and energy are a core need for families, these prices can be very volatile, so they aren’t factored in to inflation data, thus eliminating two primary necessities in the data.
- This is misleading because while reported targeted core inflation rate is 2% – 2.5%, food inflation has averaged 3.5% over the last 100 years. We’ve also seen gas prices increase from about 60 cents per gallon 40 years ago to today’s national average price of $2.41 according to AAA. One year ago, gas was $3.52 per gallon.
- Most seniors live on a fixed income of about $25,000 per year, which includes social security, pension, and income from retirement savings.
- Social Security and pensions can have cost of living adjustments, but they do not keep up with inflation, and seniors see their purchasing power diminished.
- Don’t ignore inflation. Plan ahead with your financial advisor.
- A lower risk strategy: Try to save more, spend less, and consider continuing to work.
- Consider increasing risk tolerance in your retirement portfolio by investing in options that historically keep pace with inflation.
- Keep withdrawal rates on retirement assets around 4% or lower.