Inflation and Your Money
What Is Inflation?
It's defined as an upward movement in the average level of prices. The Bureau of Labor Statistics releases a monthly report called the Consumer Price Index (CPI)
to track these fluctuations. It was developed with spending information from families and individuals on purchases in these categories: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other groups and services.
Are Investments Affected by Inflation?
Yes! As inflation changes, three notable effects are observed.
1: Inflation reduces the real rate of return on investments. Hypothetically, If an investment earned 6% for a 12-month period and inflation averaged 1.5%, the
investment's real rate of return would have been 4.5%. If taxes are considered, it could be even lower.
2: Inflation puts purchasing power at risk. When prices rise, a fixed amount of money has the power to purchase less.
3: Inflation can influence the actions of the Federal Reserve. If the Fed wants to control inflation, it has methods for reducing the amount of money in circulation. Hypothetically, a smaller supply of money leads to less spending, leading to lower prices and inflation.
When inflation is low, it's easy to overlook how rising prices affect a household budget and when inflation is high, it's tempting to make changes in response to increasing prices. A good approach is to reach out to a financial professional to help you develop a sound investment strategy that takes both possible scenarios into account.
Cornerstone Wealth Management
486 NW 2nd Avenue
Canby, OR 97013
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.