How Inflation Impacts Your Finances and Ways to Mitigate It

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Understanding Inflation: Causes, Effects, and Protection Strategies

Inflation occurs when the overall cost of goods and services rises. This means that if you’re paying more for essentials like gas, housing, clothing, and food, inflation could be the reason. For example, if the inflation rate is 2%, it means that $1 buys 2% less in goods and services than it did the previous year.

What Causes Inflation?

Three primary factors can drive inflation:

• Demand for goods and services exceeds supply, leading to higher prices.
• The cost of producing goods and services increases, with providers passing the extra expense to consumers.
• An abundance of money in the economy can lead to higher demand for goods and services, which in turn can increase production costs, including wages.

Economists often summarize inflation as “too much money chasing too few goods.”

Measuring Inflation

Inflation is measured using several indices:

• Consumer Price Index (CPI): This monthly index tracks the average change in prices paid by urban consumers for a basket of goods and services, including milk, rent, gas, and more. From October 2022 to October 2023, the CPI rose by 3.2%.
• Producer Price Index (PPI): This index measures the average change in prices that producers receive for their goods and services.
• Personal Consumption Expenditures Price Index (PCE): This index reflects changes in the prices of goods and services purchased by U.S. consumers, similar to the CPI.

How Inflation Affects Your Money

Inflation reduces the purchasing power of your dollar, meaning you pay more for goods and services than before. For instance, the price of a gallon of milk might rise by 30 cents in a year, or gas prices might increase by $1 per gallon. Inflation can also devalue money kept in savings accounts and fixed-income investments like bonds and CDs.

Who Benefits From Inflation?

While inflation can hurt consumers, it can benefit some people:

• Borrowers: The value of debt decreases with high inflation, reducing the burden of future interest payments.
• Investors: Stock prices and real estate values often rise with inflation.
• Businesses: Companies may benefit from increased prices due to higher demand, although rising costs for materials and labor can erode profits.

How to Protect Your Money From Inflation

While you can’t completely shield your money from inflation, you can take steps to mitigate its impact:

• Diversify Your Investments: Consider adjusting your investment portfolio by increasing your stock holdings and reducing bonds.
• Budgeting: Create and stick to a budget to manage everyday expenses and lower your cost of living, helping to ease inflation’s impact on your finances.

The Bottom Line

Whether the economy is experiencing inflation or deflation, it’s always a good time to ensure your credit is in top shape. You can do this by obtaining your free credit score and report from Experian.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.

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