What Is Inflation, And Should Investors Be Concerned?

Just hearing the word inflation can immediately make your heart race. But is such a response warranted? What is inflation? 

Let’s explore what inflation is, why the mere mention of inflation might make your chest tighten, and provide you with insight on how to account for inflation in your financial future. 

What Is Inflation?

So, what exactly is inflation? Investopedia defines inflation as “The rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising.” 

Not hard to see how a definition like that could make one's palms sweat. Your bill at the grocery store may be the same, but there could be less in your cart. But what taught us to have that reaction to inflation? What influences our feelings about inflation?

Media: The Great Influencer

Probably one of the most significant influencers in our life is the media. It is important to understand media bias and how it affects our outlook on inflation. Although the media has been heavily covering inflation in recent months, inflation has always posed a problem for investors. 

Thankfully, financial planners are accustomed to planning for and around inflation. 

So why is inflation so “popular” right now? As mentioned previously, it has been plastered all over the media. 

With costs on the move, many buyers are gawking at prices they see on the shelves and filling their gas tanks. Some may even worry about their futures, scrambling to figure out how to work around inflation and keep their financial futures intact. We stand ready to help you and all your financial planning needs.

The Upside of Inflation

It’s important to keep in mind that, while the media often zooms in on the negative aspects of inflation there are also some upsides. Yes, cash may have less purchasing power, but salaries and compensation for employees are also on the rise. 

Many people choose to leverage their higher costs of living to negotiate a higher salary, or to find a new job or career path that better matches their financial goals and needs. In some cases, these wage increases may continue on even when inflation balances out – benefiting their long-term financial goals, and helping them to grow. 

What Is The Government Doing?

With interest rates lagging, many are asking: what is the government doing to help stem the impact of inflation on the increased cost of living in America? 

The Federal Open Market Committee (FOMC) is the primary government body responsible for implementing tools to help regulate inflation. They work to create monetary policies that:

  1. Control wages and pricing on goods and services.
  2. Regulate the total amount of money in circulation at any given time.
  3. Adjust the federal funds interest rates to encourage banks and lenders to increase or reduce their interest rates accordingly. 

It’s important to remember that, despite these precautionary measures that the FOMC can take, the government isn’t fully in control of inflation. For a variety of reasons, their control is limited. So, while they can take steps to reduce the impact of inflation on the economy, they can’t necessarily stop it altogether. 

Financial Planning and Inflation

How can financial planning help you manage inflation’s impacts? Luckily, most professionally-built financial plans consider inflation in their assumptions. So, if you stay the course and trust your plan, then you can most likely weather the inflation storm until it passes. 

Often, we immediately assume inflation has a negative connotation, but that’s not always the case. This too will pass; you just have to stick to the plan and not make any sudden and significant financial moves. Your investment asset allocation should be diversified to address different economic factors that may occur.

Have questions about how financial planning can help you manage for and around inflation? We’re here to help! Contact us today by clicking here.


Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education, and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.

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