Impact of inflation on personal finance (2024)

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Impact of inflation on personal finance? ›

Inflation can also erode the value of your savings and retirement funds. When inflation is on the rise, central banks often respond by increasing interest rates to control it. Inflation can also have a profound effect on your investments. Inflation can also impact retirement plans if not accounted for properly.

Inflation affects every part of your daily life. Groceries, tuition, and streaming service prices go up as inflation increases. If daily expenses are rising faster than the money in savings accounts is growing, that can be enough to make people rethink their personal savings plans.

If you have a variable-rate loan, the interest rate on your loan will move up or down in line with interest rates on the market. When inflation is high, banks' interest rates may rise. As a result, the interest rate on your loan will also increase, and you will pay higher instalments.

Keep in mind, however, that inflation can also lead to consumers going deeper into debt as high prices for everyday goods strain budgets. Additionally, debt can snowball faster considering that consumers usually see higher interest rates for credit cards and new loans when inflation is higher.

This is inflation's primary and most pervasive effect. An overall rise in prices over time reduces the purchasing power of consumers since a fixed amount of money will afford progressively less consumption. Consumers lose purchasing power regardless of what the inflation rate is—whether it's 2% or 4%.

One of the most widely accepted ways to maintain value is to have a widely diversified portfolio where commodities, bonds, and inflation-protected investments balance out losses from stocks or other assets that lose value during rising inflation.

Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.

Inflation can cause a recession in some instances, such as: If inflation spurs consumers to cut spending too much. Less money in the economy means lower revenues and potentially negative growth for businesses. If the Fed raises interest rates too much to rein in inflation.

Because higher interest rates generally accompany higher inflation, an inflationary environment can have a negative effect on fixed-income securities, such as bonds and mutual funds invested in bonds. This is because bond prices tend to move in the opposite direction of interest rates.

Are people falling behind on payments? ›

Over one-third of millennials (36.7%) and Gen Zers (36.2%) are late on at least one account payment. Across all generations, millennials are the most likely to be late on paying their credit card accounts (19.6%), car payments (7.8%) and other debts (27.9%).

Prioritize paying down high-interest debt

If you have any credit card debt, that debt will increase at a higher rate, and become more expensive over time. Avoid that extra expense by taking steps to pay down any credit card debt you might have and paying off your balance each month if you can.

In the case of foreign debt, as well as in the case of domestic-indexed debt in which indexation is not treated as deficit-determining expenditure, the rate of interest is not affected by domestic inflation;⁴⁰ total interest payments will, however, grow with inflation because the nominal value of the stock of debt in ...

Prior research suggests that inflation hits low-income households hardest for several reasons. They spend more of their income on necessities such as food, gas and rent—categories with greater-than-average inflation rates—leaving few ways to reduce spending .

Inflation is measured by the consumer price index (CPI), and at low rates, it keeps the economy healthy. But when the rate of inflation rises rapidly, it can result in lower purchasing power, higher interest rates, slower economic growth and other negative economic effects.

Inflation is impacting spending and shopping behaviors

Increased prices will see some buy fewer things, but more will look to trade down to lower priced items (35%), look for products on promotion (42%) and of course turn to private label (26%).

Key Findings. Overall, U.S. household debt increased by 4.8% from November 2022 to November 2023, with credit card debt as the highest increase at 16.6%.

Think sky-high inflation won't have an impact on your credit card debt? Think again—the combination of higher prices and rising variable APRs that come with inflation is pushing credit card balances even higher.

And if you use credit cards to make purchases, your credit card debt may be higher as a result, in part due to both rising prices and higher variable credit card interest rates. No matter the reason, inflation can cause your credit card balance to increase if you don't pay your bill in full every month.

The survey also found that 37% of Americans are behind on monthly bills, which jumps to 53% among parents with young children. Additionally, 61% reported that inflation has impacted their ability to afford their lifestyle. "Yes, inflation seems to have peaked, but it hasn't gone away," Schulz continued.