The national average cost of a movie ticket in 2005 was $6.41. In 2023, the price was $11.23. Consumers recognize these price increases as a sign of inflation. The cost of a movie ticket, a house, or a semester in college tends to rise over tiᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚme.🅺 As an individual's purchasing power declines, they can seek out investment options to hedge against the effects of inflation.

Inflation and Savings

Suppose a saver has $100 in a 澳洲幸运5官方开奖结果体彩网:savings account that pays a 1% annual interest rate. After one year, they will have $101 in the account. However, if the inflation rate is 2%, the saver would need $102 to match inflation. The investor gained a dollar but 澳洲幸运5官方开奖结果体彩网:lost buying power.

When an individual's account doesn't grow at the same rate as inflation, they lose 澳洲幸运5官方开奖结果体彩网:purchasing power. Those who save money for a specific goal, such as a college fund or a 澳洲幸运5官方开奖结果体彩网:down payment on a home will see th🍷eir money's purchasing power decline while saving during inflationary periods.

Retired adults who rely on their savings won't maintain the same 澳洲幸运5官方开奖结果体彩网:standard of living if inflation cuts into their purchasing power every year. Many Americans count on a 澳洲幸运5官方开奖结果体彩网:Social Security payment during retirement.

Causes of Inflation

Inflation occurs as the demand for goods and services grows. As the total money supply in an economy rises, demand increases. As more people buy more goods, sellers tend to hike their prices. Inflation can also be temporary and limited. A winter frost that damages an orange🍬 crop reduces the su🌼pply of available oranges and increases their cost.

The U.S. government estimates inflation using measures like the Consumer Price Index (CPI) which tracks the prices of consumer goods and services, including transportation, medical care, and housing. The index is published monthly. Other measures include the Producer Price Index (PPI).

Monetary Policy

Most central banks use inflation in their country as their primary metric to determine monetary policy. In the U.S., the Federal Reserve aims to keep inflation at 2% over the long run as measured by the annual change in the price index for 澳洲幸运5官方开奖结果体彩网:personal consumption expenditu🃏res (PCE).

When prices rise faster than their target, central banks tighten 澳洲幸运5官方开奖结果体彩网:monetary policy by increasing interest rates or other policies. Hig🏅her interest rates maဣke borrowing more expensive, curtailing consumption and investment.

If inflation falls and economic output declines, the central bank will lower interest rates and implement expansionary policy tools. In the wake of the 2008 澳洲幸运5官方开奖结果体彩网:financial crisis, 澳洲幸运5官方开奖结果体彩网:central banks in the U.S., Japan, and Europe were worried that inflation could go below zero, meaning deflation, or falling prices. The Fed initiated various stimulus measures to boost the economy and encourage job creation, putting more money in consumers' hands.

How to Safeguard Savings

Several financial instruments may help savers hedge against inflation. Investors may choose accounts that earn a return higher than the inflation rate, such as 澳洲幸运5官方开奖结果体彩网:money market or 澳洲幸运5官方开奖结果体彩网:high-yield savings accounts.

Treasury Inflation-Protected Securities (TIPS) adjust the interest payouts based on changes in the CPI. The principal payment is also adjusted for inflation. Even if prices go down over the investment period, investors will still get back the original principal if they purchased the security when it was first issued. Government I bonds are another option.

Investors can also research individual stocks, mutual funds, and exchange-traded funds (ETFs). A passive indexing approach is often best since it does not depend on the stock-picking abilities of any particular 澳洲幸运5官方开奖结果体彩网:fund manager.

The Bottom Line

Inflation tends to cut into a consu💎mer’s purchasing power over time. Fortunately, there are ways of preserving the purchasing power of savings through investing in vehicles that track or surpass inflation rates.