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How the Current Inflation Affects Your Savings

How the Current Inflation Affects Your Savings

July 14, 2022

The labor department recently announced that the Consumer Price Index (CPI) in May 2022 rose to its highest level since 1981. The CPI rose to 8.6% from 8.3% in April.

That news isn’t very good for anyone. The food prices have been experiencing an increase compared to last year. Energy costs have also risen by 34.6% over the past year. And oooh, the news coming from Wall Street is nowhere near encouraging.

As you can see, the statistics available are on a macro-level. However, today our focus will be examining how this inflation affects you on a micro-level, particularly your savings.

What is Inflation?

Before we go any further, let's talk about the elephant in the room. Inflation is the sustained increase in the general level of prices for goods and services. Inflation causes a country's currency to decrease in value. It in turn decreases customer purchasing power. That’s why you cannot currently afford to buy as much stuff as you used to.

However, inflation is not all bad unless it rises. Financial experts agree that steady low inflation is healthy for any economy. For example, the Federal Reserve proposes that maintaining a steady 2% inflation rate is healthy for the US economy. You can see why the current inflation is not good, as it stands at 8.6%.

What Factors are driving the Current Inflation?

You are probably wondering what is causing or driving the current inflation. Here are some of the proposed drivers.

- Strong demand: there has been an increase in post-pandemic consumer spending resulting from increased savings accumulated during the lockdown period and government social support programs during that period.

- Decrease in the supply of goods: most of America's manufacturing is outsourced to Asian countries such as China. Factory shutdown in these countries during the pandemic and the global shipping backlogs has hugely disrupted the supply chain. 

- Service sector pressures: the rapid growth of the online service sector has contributed to increased inflation in the service sector.

So, how does this affect my savings?

The Situation May get Worse before There is a Reprieve

During inflation, any country's central bank is expected to act by developing monetary policies to curb the rising inflation. And indeed, the Federal Reserve acted by increasing the interest to help slow the rising consumer demand. The objective is to stimulate the decrease in the price of commodities by decreasing the demand.

You can expect that money will gradually dry out of the economy. The situation may worsen for households if the global supply chain issues do not ease. It may force the Federal government to increase the interest rates even higher to slow the demand for commodities drastically.

When this happens, you may be tempted to withdraw more from your savings. Remember that your saving account may also be an emergency fund during tough times.

However, that does not have to be the case for you. More so, if you have started a  side hustle, that will earn you an extra income that prevents you from doing this.

Stifled Growth

A recent World Bank report has warned world economies can fall into a recession and face periods of stifled growth. The recent Russian invasion of Ukraine does not favor the global supply chain. It is one of the leading causes of rising energy costs.

Such stifled growth may trigger tighter monetary policies such as rising interest rates. It may also lead to greater financial destabilization. The greatest fear is that the forecasted recession may force firms to take drastic measures, such as letting some employees go. That may eventually result in rising unemployment.

If the situation persists, you will likely draw from your savings. Adding unemployment into the mix may decrease your saving power and decrease your savings.

Decreased Income for Saving

The Fed's monetary policy of increasing interest rates can only result in a future decrease in purchasing power for consumers. Companies may take longer than expected to respond to the decreasing demand and lower prices. In the meantime, the wages remain the same.

Consumers will start assigning priority to what they buy. That could be bad news for your side hustle income. You may also feel the pinch, especially if the side hustle is based on items the customers classify as luxury.

That may not do your savings any favor. Reduced income mainly contributes to decreased savings, especially if you save after paying all your expenses.

Is There a Way Out?

Sadly, inflation is that one phenomenon that no one has control over, but we all pay for it. However, that does not mean you cannot continue adding to your savings account.

Be sure to catch the latest episode of the Wheeler Wealth Creation Podcast to understand how you can prevent your savings from getting hurt during the current inflation.