Hello everyone and welcome to this month’s Ask the CFP segment. This month’s question is, “Should I be worried about inflation?” Before we cover this topic, let’s remember that inflation, which is the gradual increase in prices for goods and services, is healthy for an economy. Inflation is needed, but only to a certain extent. The opposite effect is deflation, which means prices are declining over time. Imagine if the price of a car was expected to decline a year from now. You would be motivated to postpone that purchase since it would be less expensive. Systemic deflation wouldn’t be good for our economy.
So should you be worried about inflation? The Federal Reserve Bank has a goal of maintaining a 2% rate of inflation over time. Not only does inflation entice people to make purchases today instead of waiting, increasing prices on goods or services allow companies to potentially increase profits and give employees raises. These are normal conditions in a healthy economy. However, inflation deteriorates the purchasing power of money. You may know that a cup of coffee cost about 25 cents in 1970, but it’s certainly much more than that today. This devaluing effect of inflation is one of the primary downsides.
When a central bank, such as our Federal Reserve Bank, increases the supply of money through stimulus programs, it can decrease the value of our money. Since there’s more money in the system, it creates greater demand for goods and services, thus helping an economy that may be in a weak cycle. Greater demand leads to higher prices and you can then see the dots connect to higher inflation. For someone that owns assets that can appreciate, such as stocks, commodities and real estate, inflation may lead to gains on those assets. For someone with more cash assets such as CDs, money markets and bonds, inflation may lead to less purchasing power.
Overall, the Federal Reserve Bank has tools in their toolbox to fight inflation if they feel it’s too high. If you’re concerned because you have large amounts of cash assets, it may be time to speak about ways to hedge the risk. If you have a question about this topic or have a question for next month’s video, please send it to DTroyer@MonetaGroup.com. Thanks for watching and we’ll see you next month.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation.
