I keep hearing about the threat of inflation and am starting to feel it when I open up my wallet. Should I be concerned? —A Reader Dear Reader, Great question and you’re not alone. Lately, I’m hearing from lots of readers concerned about sharp increases in the cost of big-ticket items like housing and cars to everyday purchases like gas and groceries. Much of the concern about rising prices depends on your age and circumstances. Many older investors recall the double-digit inflation and gas lines of the ’70s and are understandably worried about the ability of their savings to keep pace over time. The sentiment may be very different for young people who have only known low inflation. Unless they’re competing for a house or shopping for a car, inflation may not seem like such a big deal. Whether current inflation bursts are an anomaly or a sneak peek into what lies ahead is a bit of a guessing game, even for economists. Only time will tell, but many experts believe that the Federal Reserve and prudent government policy will prevent an extended period of high inflation. Bottom line, we need to be positioned to weather whatever happens. Inflation is mostly about supply and demand To a large extent, inflation is about supply and demand—a lot of money chasing limited goods and services pushes prices up. As our economy recovers from the pandemic, we have record savings combined with pent-up demand for everything from home improvement projects to cars to travel. All of those weddings and celebrations that were postponed? For now, people seem to be willing to pay more for everything they missed. It’s a welcome bonanza for the hotels, airlines, caterers and florists who suffered for a year and a half. But how will rising inflation affect you? The answer largely depends on what you’re spending your money on and what alternative choices you have available. While older people may be more vulnerable to increases in health care costs, inflation can also be hard for younger people who may be raising children and paying for childcare or college. It’s one thing to decide to postpone a vacation and an entirely different situation if you’re buying groceries or paying a medical bill. That’s a lot of the reason inflation isn’t consistent across the board. Inflation compounds over time It may be easy to dismiss a few percentage points of price increases (the Fed considers about 2 percent inflation to be the sweet spot to keep the economy ticking but not overheat), but the truth is that even small amounts of inflation can seriously erode your net worth and purchasing power over time. Not to be macabre, but that’s why some people refer to inflation as “the silent killer.’ As an example, a 3 percent rate of inflation will cut your purchasing power by 26 percent after 10 years and 45 years after 20 years. Retiring with $1 million dollars may sound fine today, but if we have a relatively modest but consistent inflation rate of 3 percent a year, that $1 million will have the purchasing power of about $560,000 in twenty years—and less if inflation is higher. This is precisely the reason we need our investments to outpace inflation. It’s great to understand how inflation works, but even more important to take appropriate action. Here are five ways you can protect yourself against higher inflation. Five steps to help counter inflation Expecting the unexpected When we financial planners talk about ‘expecting the unexpected’ we’re usually referring to things like insurance and emergency savings—and those are essential. But anticipating and being prepared for inflation—in your spending, saving, investing, college planning, and retirement planning is equally important. You can’t control the economy, but you can be smart about how you control your own money. Therefore, my response to your question is not to worry, but to remain aware—and prepared. Have a personal finance question? Email us ataskcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries,contact Schwab. Disclosures:The Charles Schwab Foundation is a 501(c)(3) nonprofit, private foundation that is not part of Charles Schwab & Co., Inc., or its parent company, The Charles Schwab Corporation.The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness or reliability cannot be guaranteed.COPYRIGHT 2021 CHARLES SCHWAB & CO., INC. MEMBER SIPC. (#0821-1DYJ)
