The Impact Of Inflation On Your Finances

by Leon on March 20, 2015

impact of inflationMost of us have heard our grandparents grouse about the high cost of goods these days. We’ve all heard phrases like this one: “In my day a cup of coffee was five cents!” Now we pay as much as $5 for our daily cup o’ joe at Starbucks. Of course, an argument could be made that your Grande Mocha Frappuccino should cost more than a plain cup of coffee, what with all the milk, sugar, and other ingredients added in. But even that plain old coffee will cost you more than $2 today at Starbucks, a pretty big increase from 1950 (when the price of a cup of coffee rose from one nickel to two at automats). And we have inflation to thank for these increases in the cost of goods and services over time. In case you hadn’t noticed, inflation occurs without fail. And it can have a major impact on your finances.

The main issue most people face is that their salary doesn’t increase in tandem with inflation rates. What this means is you’re earning the same amount of money, but the price you pay for the same goods and services increases year upon year. The average rate of inflation in recent years has been around 2-3%. But that number can rise or fall, and considering how low it is, it’s more likely to rise in the coming years. Will you see wage increases of 2-3% each year to compensate for these increased costs? It depends on your job, most likely. But consider that California’s minimum wage increase last year followed six years without increases. If you’re relying on your state to match inflation where the minimum wage is concerned, don’t hold your breath.

So the immediate impact of inflation is pretty obvious. The loaf of bread you buy at the store, the gas you pump, the real estate you’re interested in, and nearly every product or service available is bound to increase in cost at some point. And while certain items may see only modest increases over time, others can rise rapidly and significantly. The cost of medical care, for example, has seen double-digit increases in recent years. And this brings us to the next important point, which is the impact inflation can have on your future. You might not face undue worry about rising medical costs now, but as you get older you’re likely to need more medical care, at which point these costs will become startlingly relevant.

And what about your retirement funds? Sure, you’ve been calculating how much you need to sock away so that you can continue to enjoy the lifestyle to which you’ve become accustomed. But have you accounted for inflation? If you’re putting money into a savings account, you’re probably only earning about 1% interest (probably less at the moment). With 2-3% inflation, you can see the dilemma. You need to choose retirement accounts that are going to at least match the rate of inflation if you want the money you save today to be worth as much when you’re ready to retire years from now. And keep in mind that the 2014 U.S. Inflation rates are not going to be the same as 2015, 2020, and beyond. They could go down, but they’re a lot more likely to go up. You need to plan accordingly so that you can continue to live comfortably despite the increased cost of goods and services.

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