June Featured Article

Strategies for a high inflation economy

Any American who has gone to the grocery store or purchased gas has probably noticed an increase in prices since the start of the COVID-19 pandemic. The Consumer Price Index, which measures inflation as the average change in prices for goods and services over time, noted a 6.4% increase in all items between January 2022 and January 2023. Some prices have seen a particularly large increase; food costs are up 10.1% and energy costs are up 8.7%.

With such high inflation, many Americans feel uncertain about how the economy will perform in the upcoming year. In times of economic uncertainty, it can be a good idea to take some extra measures to protect your finances.

Understanding inflation

Inflation is an increase in the prices of goods and services in an economy. As a result, the value of the currency goes down. In other words, your money doesn’t “go as far.” Inflation is normal; the Federal Reserve aims for around 2% inflation each year. High inflation is when the inflation rate is over 2% for an extended period.

Causes of high inflation

There are two main causes of inflation: Demand-pull inflation and Cost-push inflation. 
 

Demand-pull inflation This type of inflation happens when the demand for goods and services outpaces production. As a result, companies make their goods and services more expensive.		Cost-push inflation This type of inflation happens when the cost of materials rises. Companies often pass their increased costs onto consumers, leading to their products becoming more expensive.

 

Effects of high inflation

As part of cost-push inflation, companies experience the effects of high inflation when the costs of their materials increase. However, they’re often able to increase the cost of their products to maintain their profit margins.

Consumers experience the effects of inflation when they lose purchasing power, which refers to the amount of goods or service someone can buy with a unit of currency. In other words, consumers can’t buy as much as they used to with their income. If consumers don’t see an increase in their wages, they may struggle to afford groceries, gas, utilities, mortgage or rent, and other necessities. In turn, many consumers won’t have leftover money for non-necessities, like entertainment and travel, nor savings.
 

Strategies to counter inflation During times of high inflation in the American economy, there are some ways you can reduce the negative effects of inflation. These strategies fall into three main categories: spending, saving, and investing. Spending strategies Prioritize spending Stocks can help protect against inflation for long term savings, though it’s important to know that stocks may suffer in the short term. Consider market-tracking index funds that have done well over the long term. Look for sales and bargains Shop at discount stores for clothing, groceries, and household goods. Wait for sales, which tend to happen around holidays or when items are out of season. Try couponing at stores that offer them. Consider buying in bulk when there is a deal or coupon for long-term savings. Manage subscriptions Make a list of your recurring expenses and decide which ones you can cut. Examples include gym memberships, streaming services, delivery memberships, gaming subscriptions, and paid store memberships. Utilize loyalty and reward programs Sign up for free store loyalty memberships that provide rewards or savings. If you have a rewards credit card, use it for purchases where you will earn points and redeem the reward points in the most valuable way. Saving strategies   Reassess your budget Look at your budget (or create one) to see where you’re spending your money. Consider taking more conservative approaches to spending with the goal of putting more money in savings. Consider your savings account. Consider your savings account When prices rise, you may earn less interest on your savings. One option is a high-yield savings account, but these often have variable rates. Other options include Certificates of Deposit (CDs) or Money Market Accounts (MMAs), but keep in mind there are limits on how and when you can access money in these accounts. Some online bank accounts also offer higher interest rates since they have lower overhead costs than traditional banks. No matter which option you choose, keep an emergency fund in cash or a fixed-interest savings account.   Investing strategies Consider investing in stocks Stocks can help protect against inflation for long term savings, though it’s important to know that stocks may suffer in the short term. Consider market-tracking index funds that have done well over the long term. Consider investing in short term bonds Short term bonds, which mature in one to four years, may be a good option if interest rates have gone up. They come with a lower risk for losing principal, unlike longer term bonds. Short term bonds can act like extra income that you can put toward savings after you cover your expenses.. Consider investing in real estate Purchasing real estate may be a good option because the value of properties can increase with inflation. Like companies raising their prices on products, landlords can charge more in rent to ensure a profit. You can also invest in real estate through Real Estate Investment Trusts (REITs) or through mutual funds that invest in REITs. Consider investing in gold or commodities Gold may suffer in the short term, but tends to protect savings over the long term, meaning decades. Prices for raw materials like oil, metals, and agricultural products also usually increase along with inflation. However, these prices depend largely on supply and demand, which can be very unpredictable. It’s important to understand that investing in commodities is a high-risk activity with a potentially high reward.

Key takeaways

Inflation refers to an increase in the prices of goods and services. High inflation is when inflation rates are higher than 2% per year.

Consumers lose purchasing power during times of high inflation, meaning they can’t buy as much as they used to with their income. They may struggle to afford necessities and find they can’t save as much money.
Times of high inflation in the economy can be challenging. However, there are some strategies you can use to reduce the effects of inflation.

• Use savings strategies such as prioritizing spending, managing subscriptions, looking for sales and bargains, and utilizing loyalty memberships or credit card rewards.
• Use saving strategies such as reworking your budget and moving savings into higher interest accounts while maintaining an emergency fund.
• Use investment strategies that protect your savings against inflation such as investing in stocks, short term bonds, real estate, and/or gold and commodities, keeping in mind the risks of investing.

Consumers lose purchasing power during times of high inflation, meaning they can’t buy as much as they used to with their income. They may struggle to afford necessities and find they can’t save as much money.
Times of high inflation in the economy can be challenging. However, there are some strategies you can use to reduce the effects of inflation.

• Use savings strategies such as prioritizing spending, managing subscriptions, looking for sales and bargains, and utilizing loyalty memberships or credit card rewards.
• Use saving strategies such as reworking your budget and moving savings into higher interest accounts while maintaining an emergency fund.
• Use investment strategies that protect your savings against inflation such as investing in stocks, short term bonds, real estate, and/or gold and commodities, keeping in mind the risks of investing.