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What is inflation? - 7/22/2022

Updated: Jul 29, 2022

If you are listening to the news at all, and even if you aren't, you may be hearing about the current state of inflation. What does inflation mean, and how does it impact you?

Inflation is when the cost of goods and services across the whole economy are rising, and this increase lowers the amount of your spending power. You may have the same dollars to spend but everything (or at least most things) have gone up in price. Essentially, your dollars have lost their value (buying power). This may be because costs to produce items have gone up, because the demand for the object(s) are higher than the supply, transportation issues (for raw materials or finished goods), or other factors.

The government may raise interest rates to try to contain inflation. Raising interest rates can slow down inflation because it makes the cost of borrowing money higher which makes it more expensive to buy things without raising the cost of the items. This may reduce demand. For example, you are thinking of buying a new car. The price of the car doesn't go up, but if you were taking a loan out to buy the car, if the interest rates increase your loan payments increase. Raising the interest rate also raises the interest rate paid (think bank accounts and bonds). It is hoped this action discourages spending and encourages saving.

Inflation will impact your investments, but that impact (positive or negative) will depend on what you are invested in. This is why it is important to have a diversified portfolio and make sure your financial advisor is aware of your long term and short-term goals.

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