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As inflation continues to rise, the purchasing power of the American dollar continues to drop, causing headaches for consumers all over the country. Inflation and purchasing power have always been aligned, and always for the worse, but not since 1981 have the effects been this drastic [1]. Understandably, the decline in purchasing power can cast doubt into the financial hopes of those tasked with providing for families, friends and even just themselves.

Let’s talk a little bit about the correlation between inflation and purchasing power, then we’ll go over a few ways to mitigate some of the burden. First, we have to define purchasing power. On its surface, it sounds like a positive thing, doesn’t it? The money you carry in your wallet, your checking account and your investment accounts has purchasing power, or the power to purchase goods and services. Purchasing power of our money, however, isn’t stagnant. It is the value money has relative to the cost of the goods and services we purchase, and it tends to decrease over time due to inflation.

If you’ve been to the grocery store over the past year, you might have noticed the cost of staples skyrocketing. According to Forbes, foods that have seen double-digit increases in price year-over-year include beef, chicken, eggs, milk, butter, fresh fruits and frozen foods [2].

As a whole, the Bureau of Labor Statistics reports a 7.9% increase in the Consumer Price Index, yet average salaries are increasing just 3.4% [3]. In that gap between the increase in salaries and inflation sits frustration. Salaries may be increasing, but by increasing at a slower rate than inflation, Americans could actually see a realized pay cut.

Without intentionally triggering an alarm, your money is becoming less valuable by the year. When the same amount of money becomes less valuable, life can become scary as you try to use that money to fund both your current ventures and your future. That said, in the financial world, we tend to use historical trends to make predictions. While 2022’s inflation rate could push double digits, the average yearly inflation rate over the last 60 years has been just under 4% [4], so it can be reasonable to assume that this rapid rate of inflation won’t last forever.

While we wait for the storm to pass, there are a few actions we can take to lessen to the burden. First, it can be helpful to continue saving and investing. Oftentimes in the marketplace, fear spreads like wildfire, but it can actually present a buying opportunity. Though saving options like savings accounts tend to fall behind inflation, you might be able to see a great return from selling overperforming positions and taking a look at underperforming assets.

You can also look to investments with better long-term outlooks than savings accounts, like bonds and annuities. Annuities, unlike stocks, are not investments with market risk. They are contracts between buyers and issuing insurance companies that guarantee payments based on their claims-paying ability. Some annuities are actually designed to combat inflation by offering a cost of living adjustment, or a COLA. With these types of annuities, the predetermined payments are adjusted periodically to account for rising inflation.

Finally, we have an obvious solution. You can adjust your buying habits. It’s much easier said than done, but sometimes the best way to avoid losing a game is to opt to not play. It can be helpful to consider which of your expenses are necessary and which are luxuries, and if you can easily cut something that no longer brings you joy, that’s a great place to start. Cutting down on waste and short-term goods can also trim your expenditures. Efficient spending may sound difficult, but it can be beneficial, both for your current situation and for your future situation.

When in doubt, we are always available for consultation on any financial matter. For more tips on how to fight inflation and prepare yourself for the immediate and long-term future, give Sun Valley Financial a call at 602.960.0362. Until next time, stay well!

Sources:

  1. https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-
  2. https://www.forbes.com/advisor/personal-finance/food-items-more-expensive-inflation/
  3. https://www.forbes.com/sites/johnbremen/2022/04/07/why-salary-increases-do-not-keep-pace-with-inflation/?sh=9aafdfa75336
  4. https://www.worlddata.info/america/usa/inflation-rates.php