Everyday it seems like we’re reading a new headline on inflation. We worry about how high inflation is or whether or not it’s temporary. Where’s inflation coming from? Supply chain shortages? Or a tight job market? 

My question is: Does all this navel-gazing really help you? My professional opinion: No! 

So, should you be worried about inflation? Maybe, but it’s not necessarily as insidious as it may sound. It’s true that no one likes to pay more for anything, but beyond the increasing cost of goods and services (which, not to downplay, may be substantial), you have to think big picture about how it impacts you. 

First off, is inflation good or bad? 

This is a tough question to answer. It tends to be bad if it persists for long periods of time and if your earnings are not keeping up with it. Think of it this way: it’s not great if you have fixed (i.e. not adjusting) sources of income and everything you buy gets more expensive. For those in a different financial position, it may not be so difficult. While someone else may experience rising costs of things, their income may likely keep pace or exceed the growth of those expenses. It’s all relative. 

Economic sidebar: Really high inflation that is sustained over time is bad (that’s called hyperinflation). And falling prices or deflation is equally bad. Sounds backward, right? Why, if something costs you less, is that a bad thing? If it’s happening in the overall economy, it means the economy is shrinking, and no one is investing. The aftermath of the 2008 financial crisis was a grim example of an economy primed for deflation. The Federal Reserve was more concerned about deflation as the change in inflation rates was negative for a period of time. They were successful in keeping us out of a deflationary period of time. 

Does the inflation outlook change your investment strategy? 

In a word, no. Generally speaking, stocks and real estate are very good hedges against inflation. And that’s because companies usually pass along the costs of their costs to consumers (as opposed to you, the investor). If home prices go up because of inflation, homeowners enjoy an appreciating asset. It’s even better if you have a fixed-rate mortgage; the value of your home goes up and the cost (your mortgage) stays the same! 

How does this impact my planning? 

It depends! If you are still accumulating assets by saving and investing each month, then assessing how much you can save may change. You’ll want to closely monitor your ability to save if your income stays unchanged and the cost of all your living expenses goes up. If you’re in a different or later stage of life, when you are drawing down on your savings and investments, inflation should be monitored in the context of your planning. 

Any good financial plan has inflation assumptions baked into the planning.  Check to see if you are actually spending more than you had planned. If you’re in retirement, for example, you may find your spending is still on target despite inflation (because your smart financial planner took it into account). You can also always see what a higher level of inflation may mean for your longer term plans. Say your plan takes into account a 2% inflation rate; what happens to your plan if it increases to 3 or 4%? Play around with some possibilities so you can see the real impact on your finances. 

Does higher inflation mean interest rates will rise? 

Probably! Interest rates are used as a mechanism to control inflation. They can impact a variety of different things such as debts you have or assets you own. But again, this is only relevant within the context of your bigger picture planning. Rising interest rates may mean any floating rate debt becomes more costly or new purchases like a car or home may cost more. For assets like stocks and bonds, rising interest rates (depending on how much they rise) can mean a mixed bag. For a more detailed explanation, read our previous post about rising interest rates. 

As with any financial event at the macro level, remember to take time to understand how exactly those impact you at the individual level. You’ll probably find that you can continue on with your financial plan without much concern.  

Interested in receiving this content in our monthly newsletter? Sign up here!