Key Takeaways
Inflation can affect your spending, investments and retirement income — but an economic headline doesn’t automatically mean your financial plan needs to change. The key is understanding whether changing conditions have affected the assumptions behind your plan.
“$6 for this?”
You’ve probably had a moment like that lately.
Maybe it happened at the grocery store. Maybe it was when you filled up your car. You see the price, do a double take and wonder if you remembered it wrong. Did this really cost that much last time?
Then there are the packages themselves.
The box looks familiar, but somehow there’s less inside. The bag feels a little lighter. The container that used to last all week seems to run out a few days early.
Even if rising prices haven’t put significant pressure on your own budget, you’ve probably heard friends or family talking about the cost of everyday expenses.
In other words, the cost of living has been a sore spot for many Americans for a while. And the latest economic data suggests that those concerns aren’t unfounded.
Inflation Is Still Affecting Everyday Expenses
Earlier this month, the government released its latest Consumer Price Index, or CPI, report.
Think of the CPI as a giant shopping basket. It tracks how prices change across many of the goods and services Americans regularly spend money on, from groceries and gasoline to rent and medical care.
Economists watch the CPI closely because it provides a snapshot of how quickly the cost of living is changing.
And the latest snapshot wasn’t particularly encouraging.
Prices rose 3.4% over the past year.
For context, the Federal Reserve aims for inflation of around 2% over the long run. That means 3.4% is still well above the Fed’s stated long-term goal.
For consumers, that difference can be meaningful. Even when inflation is lower than it was during periods of particularly rapid price increases, prices generally don’t go backward. Once the price of a good or service rises, it can remain elevated even if the rate of inflation begins to slow.
That’s one reason inflation can continue to affect household budgets long after the initial price increases make headlines.
What’s Pushing Prices Higher?
There isn’t necessarily one explanation for higher prices. Inflation can be influenced by a variety of factors, including energy costs, wages, consumer demand and business investment.
Energy Costs
Energy is one important part of the story.
The war with Iran has disrupted global energy markets. Disruptions in the Strait of Hormuz, along with attacks on energy infrastructure across the Middle East, have helped push oil above $100 a barrel.
You’ve probably seen some of the effects at the gas pump.
But higher energy costs can extend beyond what you pay to fill your car. Energy is an input for businesses across the economy, so higher costs can eventually affect the prices of other goods and services as well.
A Tight Labor Market
The U.S. economy has remained relatively strong, and the job market remains tight. However, that tightness is being driven less by strong hiring and more by a shrinking pool of workers as retirements increase.
When businesses have fewer workers available, labor costs can remain elevated. Those costs can become another factor businesses consider when setting prices.
The AI Boom
Then there’s the rapid growth of artificial intelligence.
Companies continue to invest heavily in data centers and other infrastructure needed to support AI. Building and operating that infrastructure requires workers and enormous amounts of electricity, adding demand to an already-busy economy.
The long-term economic effects of AI investment remain an evolving story, but the scale of the spending is significant enough to influence demand for labor, energy and other resources.
Why Inflation Matters to Investors
Inflation doesn’t live only in an economic report.
People experience it when they fill up their cars, buy groceries or pay household bills.
And inflation can affect your investments, too.
Higher inflation can contribute to higher interest rates, which can put pressure on bond prices. It can also create challenges for stocks, particularly when investors are adjusting their expectations for borrowing costs, corporate expenses and future earnings.
That doesn’t mean every period of elevated inflation requires investors to make changes to their portfolios.
Instead, it’s worth understanding how changing economic conditions fit into the bigger picture of your financial plan.
Does Higher Inflation Change Your Financial Plan?
This is where the conversation gets more interesting.
Economic headlines can be useful signals. But a headline by itself doesn’t tell you what you should do with your money.
We like to think about moments like this a little like a warning light on your car’s dashboard.
You don’t necessarily pull over and rebuild the engine every time a light comes on. You figure out what triggered it and determine whether anything needs your attention.
The same idea can apply to financial planning.
Maybe inflation has changed some of your assumptions. Maybe it hasn’t.
For someone approaching retirement, for example, higher-than-expected inflation could affect how much income they need to maintain their lifestyle. For someone already retired, it could be worth revisiting whether their spending or portfolio withdrawals are tracking with their original plan.
Other questions might include:
- Has your retirement timeline changed?
- Do you need more income from your portfolio than originally expected?
- Have your spending needs changed?
- Is your portfolio still aligned with your goals and time horizon?
- Are your assumptions about future expenses still reasonable?
These questions are more useful than simply reacting to the latest inflation headline.
Plan for Difficult Periods, Not Just Ideal Ones
Inflation can run hotter than expected. Markets can experience uncomfortable stretches. Interest rates can change. And economic conditions can shift in ways that are difficult to predict.
That’s why a financial plan shouldn’t be built around the assumption that everything will go according to schedule.
An intentional plan gives you a framework for navigating periods of uncertainty and determining when something actually deserves a closer look.
Sometimes new economic conditions may call for a change. Other times, they may simply be a reminder to stay focused on the plan you already have.
The important thing is knowing the difference.
And that isn’t always easy to determine on your own.
If you’re wondering how today’s inflation and economic environment could affect your financial plan, a conversation with a financial advisor can help you take a closer look at the assumptions behind your plan and determine whether anything needs to change.
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Bautis Financial LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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