Personal Finance

Prices are going up — here’s what inflation means to you

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Key Points
  • As the economy picks up, so will inflation.
  • There are, however, ways to protect yourself from rising costs.
  • For retirees on a fixed income, this is particularly important.
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U.S. consumer prices rise 4.2% from a year ago, faster than expected

From gas and groceries to computers, cars and clothing, Americans are already paying more for everyday expenses.  

As the economy reopens in the wake of the coronavirus pandemic, consumers are putting their stimulus checks, enhanced unemployment benefits and stashed cash to work.

Yet all that spending — coupled with supply chain setbacks — is driving prices higher and decreasing your purchasing power over time.

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"Inflation is the cost of an expanding economy," said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York.

Last month, inflation accelerated at its fastest pace in more than 12 years as the economic recovery kicked into gear, the Labor Department said Wednesday.

Americans' expectations for inflation over the next few years also hit its highest level in nearly a decade, according to another report by the Federal Reserve Bank of New York.  

Overall, the expectation is that the inflation rate will be up to 3.4% one year from now — its highest level since September 2013 — and at 3.1% three years from now, the Fed survey found.

How inflation affects you

For the average consumer, some inflation isn't necessarily bad, particularly compared with last year when the Covid crisis caused a widespread shutdown of the U.S. economy.

"Price rebounds coming out of a recession is normal," said Greg McBride, chief financial analyst at Bankrate.com.

Many households are well equipped to weather those rising costs, although the diverging nature of the recovery has left others facing long-term unemployment, possible eviction and food insecurity.

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The country's uneven economic recovery

For homeowners, the best way to hedge against inflation and create some breathing room in your budget is to refinance your mortgage, if you haven't already, McBride said.

"Locking in the biggest payment in your household budget and cementing that at a time when prices are rising is pretty compelling."

With mortgage rates near historic lows, households may even be able to cut their payments by $100 to $200 a month, McBride added.

If you don't own a home, there are other opportunities to refinance high-interest debt. Lower interest rates on everything from credit card APRs to personal loans can be a great tool for consolidating and reducing monthly expenses.

Retirement plans at risk

For retirees, there are additional risks to rising prices. Because older Americans often live on a fixed budget, having to absorb those higher costs can hit them harder.

Further, they're not only paying for escalating food costs, housing and cars but also hefty medical expenses, particularly amid Covid-19.  

"Now, all of a sudden, the money they have for their livelihood will be stressed further," Boneparth said.

To maintain your purchasing power, determine the right assets for your risk tolerance, considering your income, expenses and time horizon.

If inflation is above what you're earning in Treasurys, that part of your portfolio loses buying power. But, there are other investments that make up for it, Boneparth said.

For example, consider a mix of commodities, Treasury inflation-protected securities and equities to offer some security.

This is exactly why you need a pretty healthy allocation, McBride added, "because it protects your buying power in times of inflation."

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