“Inflation is, in general terms, an upward movement in the average level of prices,” says Andrea Hartwig, Financial Planner at Member Benefits. “And it certainly can affect your investments.” Some of the effects it has as inflation rises and falls are:
- Inflation reduces the real rate of return on investments. If an investment earned 6% for a 12-month period and inflation averaged 1.5% over that time, the investment’s real rate of return would have been 4.5%. If taxes are considered, the real rate of return may be reduced even further.
- Inflation puts purchasing power at risk. When prices rise, a fixed amount of money has the power to purchase fewer and fewer goods.
- Inflation can influence the actions of the Federal Reserve. If the Fed wants to control inflation, it has various methods for reducing the amount of money in circulation. Hypothetically, a smaller supply of money would lead to less spending, which may lead to lower prices and lower inflation.
What can you do to mitigate inflation on your investments? Consider meeting with a trusted professional such as the financial advisors at Member Benefits. Andrea adds, “When inflation is low, it’s easy to overlook how rising prices are affecting your budget. But when inflation is high, it may be tempting to make more sweeping changes in response to increasing prices. The best approach may be to reach out to us to help you develop a sound investment strategy that takes both possible scenarios into account.”