Inflation is hard to understand – this is how it actually affects your money

Inflation – that’s a word you hear frequently, but do you really understand what it means?

The main impact of inflation is Better interest rates on savings accounts And while it costs more to live, there are some subtle effects to keep in mind when managing your money.

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A deeper understanding of different types of inflation and how they can positively and negatively affect your life can help you make better financial decisions, especially. Protect your money now and in the long term.

Why is it relatively low inflation today compared to a few years ago? Living expenses Do you still feel that it’s very expensive? Now, inflation is simply the rate at which prices of goods and services rise, so many people have been stomping on water financially over the past few years.

If there are rumours of a recession or rising inflation, your purchasing power may feel like it has reached a barrier. Here are some key points for inflation in 2025:

• Inflation affects all prices around you and is influenced by many factors such as supply chain issues, housing crisis, tariffs, consumer demand, and more. A simple definition of inflation is the increase in the cost of goods and services over time in the economy, usually expressed as a percentage of the year.

• Many economists expect inflation to rise by 2.5% in 2025.

• Volatile food and energy costs are estimated to reach between 2.5% and 2.7%.

• Inflation rose 0.2% in the 12 months that ended in April 2025, with current inflation rates of 2.3% and core inflation rates close to 2.8%.

• Inflation rates are measured by the Bureau of Labor Statistics’ Consumer Price Index (CPI) and the Bureau of Economic Analysis’s Personal Consumption Expense (PCE) price index.

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Not all outcomes of inflation are bad. In fact, maintaining healthy inflation is good for the economy. Below are some of the positive and negative effects of inflation:

Investors with short-term goals may invest in high-profit savings accounts if they believe they need immediate access to funds. If this sounds like you, it can increase your short-term savings. This is because increasing inflation encourages the Federal Reserve to raise interest rates, and banks often raise interest rates paid on savings deposits. Therefore, you can earn profits for better profits of money sitting in your cash or savings account.

But that’s not the only thing the banks have raised. When the Federal Reserve raises interest rates, it becomes more expensive for banks to borrow money from each other. These rates of increase will be passed on to individuals and business borrowers. The bottom line means higher inflation means higher interest rates on the money you borrow, and there’s less money in your pocket.

With inflation, almost all prices begin to rise. Prescription medicines may increase medical care and prices, and rents may also rise. And, unless your salary rises at least as much as inflation as your inflation rate, you will try to pay for an increase in the cost of items with the same income, so inflation can be difficult, especially in your wallet during hyperinflation.

Hyperinflation occurs when a very high inflation spiral becomes out of control. Also, pay attention to the phrase “core inflation,” which is a measure of inflation that excludes certain volatile markets such as energy and food.

On the other hand, if the term “all item consumer price index” is displayed, it is a measure of inflation across the economy. According to the Bureau of Labor Statistics, the consumer price index for all items has risen 3.2% from a year ago.

Higher prices of goods and services due to inflation are positively correlated with higher wages. (4) Not only do companies decide that they need to provide better salaries for new recruits, they must also take even more care to significantly compensate existing employees in order to retain the talent they already have. This means that if you are looking for a new job, as inflation is rising, you may be able to get more paid in the new company, but you may have more opportunities for pay increases.

The borrower who holds Adjustable mortgage You may find that the unpleasant effect of inflation is higher interest rates if the mortgage is “adjusted.” As seen on the 5/1 arm, adjustable mortgages will enable the “teaser” rate for a set time, such as five years. However, five years later, the rate will be “adjusted” every year. If interest rates rise during the adjustment period due to inflation, mortgage interest will increase and monthly payments will also increase.

Even if you don’t have the money to invest in stocks, gold or other assets that could be positively affected by rising inflation, a bit of inflation could still benefit your financial situation. Beneficiaries of Social Security and Supplementary Security Income could increase their monthly payments when the consumer price index, one of the inflation measures, rises. This is called cost-of-living adjustments and means there are a few more dollars to cover your monthly budget.

For investors who count long-term, conservative investments as a key part of their net worth, inflation can be a foul language. This is because these traditionally safe investments, such as bonds, often require investors to be locked in long-term security interest rates. Inflation creates a situation in which these long-term investments, which pay low interest rates, reduce purchasing power as inflation drives the prices of goods and services.

The best way to combat inflation outcomes is to invest in a balanced portfolio that includes some of the long-term capital investments, such as stocks. Ideally, these stocks will increase in value over time and will exceed inflation.

Investing in more conservative investments such as bonds may be a safer way to do this, but some experts disagree. Because in an age of higher inflation, the lower rate of safer investments can fall below inflation.

Instead, consider protecting your money from inflation by investing in:

• Ministry of Finance Inflation Protection Securities: The hint is bonds, but they are supported by the government, and their return is linked to inflation through CPI.

• Blue chip stock: These provide long-term dividends and capital gains.

Think about how an increase or decrease in inflation can affect your life, including grocery bills, short-term savings, retirement savings, revenue and vacation plans. Understanding how inflation works can help you make wise economic choices, allowing you to make the best decisions for your family.

Caitlyn Moorhead contributed to the report for this article.

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This article was originally published gobankingrates.com: Inflation is hard to understand – this is how it actually affects your money