Question: How Does Inflation Impact my Life?
Answer: Inflation hurts your standard of living because you have to pay more and more for the same goods and services. If your income doesn't increase at the same rate as inflation, you will find your standard of living declining even though you are making more. Also, inflation doesn't impact everything equally, so that some things (such as gas prices) can double while other things (your home) may lose value. For this reason, it makes financial planning more difficult.
Inflation is really bad for your retirement planning because your target will have to keep getting higher and higher to pay for the same quality of life. In other words, your savings will buy less and less, so you will need to save more and more. However, everything you buy today costs more, so you have less left-over income available to save.
Inflation has another bad side effect....once people start to expect inflation, they will spend now rather than later, because things will only cost more later. This consumer spending heats up the economy even more, leading to further inflation - this situation is known as spiraling inflation because it spirals out of control.
It is also important if you are holding bonds or Treasury notes. These fixed price assets only give a fixed return each year. As inflation spirals faster than the return on these assets, they become less valuable. As they become less valuable, people rush to sell them, further depreciating their value. As their value becomes lower, the US government is forced to offer higher interest rates to sell them at all.
Inflation FAQ
- What is Inflation?
- How Does Inflation Impact My Life?
- Why Hasn't Inflation Been a Concern Until Now?
- Who Are the Major Players in the Battle Against Inflation?
- What is Being Done to Control Inflation?
- How Can I Protect Myself From Inflation?
