Inflation is the talk of the times, with everything from utilities to clothes to groceries rising in cost at levels not seen in decades.1 To make matters more complicated, interest rates are now rising as a countermeasure.2 Because of their rapid onset, many people have questions about how inflation works, why interest rates rise, and why it’s all happening now. Here’s a high-level view.
Why is inflation happening?
While many factors determine the global cost of goods and services, the current spike in prices can be attributed in part to a few key causes:1
1. COVID-19 recovery: After a long lock-down and limited spending, consumers are now spending more, which increases demand.
2. Supply-chain issues: In addition to increased spending and demand, COVID-related delays in shipping and manufacturing has led to shortages that drive up the cost of supplies.
3. The war in Ukraine: While it may seem like a far-off problem for many of us, the Russian invasion of Ukraine has created food and energy shortages that have a worldwide ripple effect.
Inflation and interest rates may seem out of your control, but there are steps you can take to protect yourself.
Put together, these factors have created a unique economic storm for consumers to navigate. Some consumers may be able to ride out this inflationary period, but for some families, the cost increases for everyday staples such as food, gas and clothing may be difficult to manage.
Why are interest rates increasing?
To combat the rising prices, the U.S. Federal Reserve has also been raising interest rates.2 While it may seem counterintuitive, this is actually an effort to slow down spending to help bring inflation back under control. And while higher interest rates may seem surprising—especially if you’re buying a house, a car or other rate-sensitive purchase—keep in mind that interest rates remain at historically low levels, for now.
What can you do?
Inflation and interest rates may seem out of your control, but there are steps you can take to protect yourself. First, check out our article, Five ways to save during inflation. Here are a few additional tips to consider:
1. Pay off high-interest credit cards first: If you have multiple credit cards, pay more on those with already higher interest rates, as these rates will potentially increase further and make them more difficult to pay off.
2. Always shop around: Prices for goods and services can vary widely, and it’s never been easier to compare prices online. Everything from groceries to mortgage rates can be scouted in advance. You may save money by taking time to compare before you buy.
3. Keep your retirement on track: If you’re saving for retirement, make sure your plans account for the increasing cost of goods and services in the future. Annuities can provide growth potential and cost-of-living increases that may help offset inflation.
Ask a professional
Every consumer and family has different needs. To tailor a financial plan to your situation that accounts for inflation and higher interest rates, contact a financial professional.