Erickson Financial Solutions Blog
1-minute video: Impact of Inflation in retirement
Can inflation hurt you?
Inflation is a rise in price over time. Commonly you will read about the Consumer Price Index (CPI) which provides the direction of prices of the component items upon which the index is based. Not everything you might buy in a week or month is in the list, but the idea is to get a representative sample of many important items.
Lately, news stories have talked about the rise in inflation. A rise in prices, or CPI, in isolation does not tell you much especially if not compared to something meaningful to you. For many years this rate has been low by historical standards, but now it is beginning to rise. Along with this rise is a rise in interest rates, both long-term and short term rates, which effects the rate borrowers pay for goods and services they pay for with debt whether a car, house or even a credit card debit that is not fully paid at month’s end.
So, can inflation hurt you? Yes, it might if your income fails to grow as fast as inflation. Hypothetically, if a grocery item you always consume costs $3.50 today and inflation is 4%, then in eighteen years you will need $7.00 to buy the same item. If you are on a fixed pension, you have a problem. The cost has doubled, but your income has not.
You can not control inflation, but you can control in what investments you place your money. For most people, some portion will need to be in assets which, in the long-term, rise in value faster than inflation. That way, when the item doubles in price, hopefully your investments will have more than doubled in value. Finding the right mix of investments for your situation will take time, effort, and expertise. The right mix is different for everyone and changes through time.