Inflation has been a hot topic in recent years, often misunderstood and heavily debated. It’s not a new issue. In fact, attempting to stay ahead of inflation is one of the biggest reasons to invest over the long term. Let’s break it down and focus on what really matters.
The Blame Game
The politics of inflation are focused on who to blame. Depending on the perspective and motivation of the source, the Presidential Administration was at fault, or COVID was at fault, or greedy corporations, or the Federal Reserve. Anytime something negatively affects us, it’s human nature to look for someone or something to target our pent-up anger at.
Media narratives tend to stoke those flames of outrage, trying to predict the next big things that will make our lives worse. With a new Presidential Administration coming in 2025, its priorities are in the spotlight. You may have heard about new policy decisions related to deficits, tariffs, energy prices, and regulations that will either tame inflation or make it worse, depending on the specific biases of the messenger.
What is inflation?
Simply put, inflation is the increase in cost of the things we buy (housing, gas, groceries, cars, and all the stuff in your Amazon cart). When prices go up over time, our dollars buy less, which is why you may hear that inflation is also the erosion of purchasing power. Inflation is reported as the Consumer Price Index (CPI), which shows the average annual increase of prices over the timeframe of that report. For example in 2022, the CPI was 9.1%. By November 2024, it had dropped to 2.7%.1 Unfortunately, that doesn’t mean that prices actually went down in that timeframe. It only means that prices were still rising but at a slower rate. If prices actually fell, that would be called deflation, which comes with its own set of problems for the economy.
Understand your real rate of return
Generally, consumers (and governments) can’t completely avoid or prevent inflation, so what do we do about it? We can change what we spend money on, but that only works on those discretionary (optional) items. It’s not as easy to cut our spending on housing or energy, for example. The other decision within our control: We can invest over the long term in assets that we expect to go up in value faster than the rate of inflation. That additional growth, or “spread,” above inflation is referred to as your ”real rate of return.”
How to Beat Inflation
What’s the most important investment decision in attempting to beat inflation? Historically, it’s asset allocation, the portion of your overall financial resources (money) that is in cash and bonds. Those are designed to stay stable and earn interest, compared to the amount that is allocated to assets like stocks and real estate, which are more likely to appreciate over time. If we assume that some level of inflation will always be around, the best thing we can do is attempt to earn real returns, returns that exceed the rate of inflation. Keeping all of your money in a checking account or, even worse, a coffee can) will all but guarantee that you can’t keep up with inflation. That is because it’s not earning you a return. Historically, investing, and staying invested, in the stock market has been the most reliable way to stay ahead of inflation over the long term.
Stay focused on your plan
The best response to inflation concerns, market volatility, interest rate concerns, or political concerns? To paraphrase Nick Murray, “We’ve planned for this.” Having a financial plan gives us confidence that we’re prepared to meet our financial goals AND withstand the bad news of the day, whatever the day may throw at us. When working with your financial planner, stay focused on those decisions that are at least partially within your control, things like how much you spend, how much you save, where you live, when you retire, and how you allocate your assets. These factors have proven to be what’s truly important to building financial security and the peace of mind that comes along with it.
Being Truly Cared For™ means more than just guidance—it’s about understanding your passions and using proven methods to help you reach your goals. There will always be risks that are out of your control, including inflation. Other risks include longevity, market volatility, geopolitical events, and some things we can’t even imagine today. But you and your financial planner can test your plan against any number of these scenarios to uncover potential blind spots and address them before something derails your livelihood. That way, when someone tries to pull you into conversations like who to blame for inflation or what the next administration’s policies will do, you can confidently reply, “We’ve planned for this.”
1Sources: Bloomberg, Bureau of Labor Statistics