How Does Inflation Impact My Life? Impact on You and the Economy
Why President Reagan Said "It's as Violent as a Mugger"
Inflation hurts your buying power. It means you have to pay more for the same goods and services. Inflation can help you if you are a lucky recipient of income inflation. You also might benefit from asset inflation, such as in housing or stocks, if you own an asset before the price rises.
But if your income doesn’t increase or increases at a slower rate than general inflation, your buying power declines.
Inflation doesn't affect everything the same way. Gas prices can double while your home loses value. That's what happened during the financial crisis of 2008. There was deflation in home prices, which fell 31.8 percent.
Meanwhile, inflation occurred in oil prices. They reached an all-time high of $148 a barrel. Since oil prices drive gas prices, the cost of gas rose to $5 a gallon. Driving to work became even more expensive and stressful. That was at a time when many workers were worried about keeping their job. For more, see Inflation and Deflation: Causes and Effects.
As a result, they bought gold. The price of gold rose to a record of $1,895 an ounce on September 5, 2011. In this instance, there was inflation in gold and oil prices with deflation in housing prices and personal income.
Inflation has another side effect. Once people start to expect inflation, they will spend now rather than later.
That's because they know prices will be higher later. Consumer spending heats up the economy, creating ever-higher inflation. It's called spiraling inflation because it spirals out of control.
If inflation reaches the double-digits, that's hyperinflation. If it happens, you will need a wheelbarrow of money to buy a loaf of bread. Hyperinflation only happens when the government is so irresponsible that it prints money without regard to the inflation rate. It happened in Germany in the 1920s and in Zimbabwe in the 2000s. If inflation ever approaches the double-digits, your best defense is to buy gold or any currency that isn't pegged to the dollar. For more, see U.S. Economic Collapse.
Effect of Inflation on Retirement Planning
The combination of inflation in some asset classes and deflation in others, makes financial planning more difficult. Rules of thumb no longer apply. One of the reasons government economists didn't do more to head off the recession was because they couldn't believe housing prices would ever fall.
As a result, to be prepared for inflation during your retirement, you should save more than you think you will need.
Impact of Inflation on Treasury Bonds
Inflation is important if you hold bonds or Treasury notes. These fixed income assets pay the same amount each year. As inflation rises faster than the return on these assets, they become less valuable. People rush to sell them, further depreciating their value. When that happens, the U.S. government is forced to offer higher Treasury yields to sell them at all. This increases most mortgage interest rates.
This lowers the value of your investments. It also increases the cost to the federal government of financing the U.S. debt. It increases the interest on the national debt. The additional budget expense needs to be offset by a cut in the discretionary budget or an increase in taxes.
- Why Hasn't Inflation Been a Concern Until Now?
- Who Are the Major Players in the Battle Against Inflation?
- What Is Being Done to Control Inflation?
- How Can I Protect Myself From Inflation?