The Impact of Inflation

Inflation measures the rate at which goods and services increase in price over a time frame.  Why it matters:  Let’s look at savings for example: 

I received a notification that the rate of my savings account is changing to 3.5%.  This means $100,000 in savings earns 3.5% = $103,500 at the end of the year. 

Yet the rate of inflation is 6.5% this means that the amount of goods that I can purchase at the end of the year is equal to $97,000.   (3% loss)

The same holds true for income.  If you receive a 5% annual raise and inflation is 6.5% you lose 1.5%  of spending power.   The problem with inflation even if the rate changes is the prices for goods and services do not.  Your local landscaper or cable company for example that increases rates are not going to ever come back to you and say, “Hey you know what.  Now that the rate of inflation is down I’m going to charge you less monthly. ”  

One of the goals of investing is to out pace the rate of inflation.