Inflation is at its highest in the US for four decades. This means that everything gets more expensive: food, fuel, housing, entertainment, and travel. But it also has a large impact on savings.
What is inflation?
Inflation is an increase in the price of goods and services. With a 9.1% inflation rate, what was $100 last year now costs $109.1. Economists usually calculate inflation based on a basket of goods to obtain the consumer price index. The consumer price index usually looks at the prices of standard products and services consumed by households: what you buy at grocery stores, the gas prices, or how much you would pay for a new car. Higher prices = higher inflation.
Current inflation comes from multiple factors: low interest rates by the fed, supply chain constraints, Ukraine conflicts, and benefits packages provided by the US government during the pandemic. All these elements increased either the money supply or the inherent price of goods.
Since early 2022, the federal reserve has sharply increased its interest rates to reduce the money supply and counterbalance inflation. This rate hike has limited to no success so far.
Why does it matter for my savings?
Inflation is an increase in the price of goods and services. With a 9.1% inflation rate, what was $100 last year now costs $109.1. Economists usually calculate inflation based on a basket of goods to obtain the consumer price index. The consumer price index usually looks at the prices of standard products and services consumed by households: what you buy at grocery stores, the gas prices, or how much you would pay for a new car. Higher prices = higher inflation.
Current inflation comes from multiple factors: low interest rates by the fed, supply chain constraints, Ukraine conflicts, and benefits packages provided by the US government during the pandemic. All these elements increased either the money supply or the inherent price of goods.
Since early 2022, the federal reserve has sharply increased its interest rates to reduce the money supply and counterbalance inflation. This rate hike has limited to no success so far.
What can I do to protect my savings?
Here are some personal finance tips you can use to protect your savings
- Keep investing: if you are young, you have a long saving time horizon. You can take on more risks and put your money into diversified sustainable portfolios. Cutting expenses in the short term should help you maintain your investment objectives and keep saving money.
- Keep only the cash you need: cash generates low returns. It is important to keep cash only for as little as you need in your bank account. Place the cash in high yields accounts, treasury bonds, or inflation bonds. Similarly, keep no more than what you need in your emergency fund. And remember that its value decreases. Check every quarter that it still reflects your financial needs.
How to make it sustainable?
Investing in times of high inflation should not change your strategy when it comes to sustainability. Temperature is rising whether inflation is here or not. Therefore you should keep your investment strategy. Remember that you are here for the long term.
Therefore, your investment portfolio should be in funds that are climate-friendly (and not greenwashed). The good news is that inflation is in a way climate-friendly. With higher gas prices, inflation reduces oil consumption and favors the use of renewable energy, energy preservation technologies, and other climate solutions.
To see whether your investment portfolio is sustainable, you can use As You Sow to check how your funds rank. You might also talk to your financial planner or wait for our launch in October!
