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How Rising Prices Impact Your Budget and Financial Goals
If the current annual inflation rate is under 3%, why does everything feel so much more expensive?
It's a question many of us ask. Even when inflation appears moderate in the news, everyday expenses like groceries, gas, and insurance can rise much faster. Understanding how inflation works is important. Since it affects your financial investments, it's crucial to have insight into how inflation is reported. Understanding how inflation impacts your savings and investments helps you make smarter money moves. It allows you to stay confident in your financial plan.
What Is Inflation?
Inflation is the gradual increase in prices over time, which reduces the purchasing power of money. Simply put, when inflation rises, each dollar doesn't stretch as far as it used to.
The most commonly used measure of inflation is the Consumer Price Index (CPI), published monthly by the U.S. Bureau of Labor Statistics. CPI tracks price changes across a broad range of everyday goods and services, including:
- Food and beverages
- Housing
- Transportation
- Medical care
- Education and communication
- Recreation and apparel
By averaging price changes provided by families and individuals across these categories, CPI provides a snapshot of overall inflation.
Why Inflation May Feel Higher Than Reported
Inflation affects everyone differently because no two budgets look the same.
Overall inflation may remain low. However, certain categories like transportation, utilities, or insurance may increase much faster than others. If those expenses make up a larger share of your monthly spending, inflation can feel higher than the national average.
That's why it's important to focus on your numbers, not just the headlines. Tools like Logix's financial wellness resources and money management calculators can help you track spending. These tools let you see exactly where rising costs are affecting you most.
How Inflation Impacts Your Savings and Investments
Inflation doesn't just affect your day-to-day expenses; it also plays a key role in your long-term financial health.
Inflation Reduces Real Investment Returns
When evaluating investment performance, it's important to account for inflation. For example, if an investment earns 6 percent in a year and inflation averages 1.5 percent, the investment's real rate of return is closer to 4.5 percent. If taxes are considered, the real rate of return may be reduced even further.*
Inflation Puts Purchasing Power at Risk
When prices rise, a fixed amount of money has the power to purchase fewer goods and services. That's why choosing the right mix of Savings Accounts, Certificate Accounts, and Investment options is essential to keeping your money working for you.
Inflation Can Influence the Actions of the Federal Reserve
If the Federal Reserve wants to control inflation, it has various methods for reducing the amount of money in circulation. Hypothetically, a smaller supply of money would lead to less spending, which may lead to lower prices and lower inflation. Additionally, there may be changes to interest rates. These shifts can affect loan rates, savings yields, and overall market conditions, making it even more important to stay informed and flexible.
Staying Financially Confident, No Matter the Economy
When inflation is low, it's easy to overlook how rising prices are affecting your household budget. On the other hand, when inflation rises, it can be tempting to make sudden financial changes. At Logix, we believe the best approach is an informed and steady one; built around education, planning, and support.
Working with a trusted financial professional and utilizing reliable resources can help you:
- Build a budget that adapts to rising costs
- Balance short-term needs with long-term goals
- Adjust your investment strategy as economic conditions change
Logix offers a variety of financial investment resources and free branch seminars and workshops designed to help you navigate changing economic conditions with confidence.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.
*This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Past performance does not guarantee future results.