Share on facebook
Share on twitter
Share on linkedin

Inflation Is On The Rise And Could Soon Hit Your Savings Accounts.

The government has been struggling to keep inflation in check. However, prices have been surging for various goods and services, and the government is looking for ways to stem the tide. One possible solution that has been floated is to limit how much money savers can earn on their deposits. This could significantly impact borrowers, so it’s essential to understand what’s going on and how it could affect you.

What is rising inflation?

It means that the purchasing power of each dollar you have saved declines over time. This is because, as inflation increases, your dollars will buy less and less. For example, if the annual inflation rate was two percent and you had $100 saved, that $100 would only be able to purchase about $102 worth of goods and services after one year. Then, after two years, it would only be able to buy back $98 worth of goods and services, and so on.

The Consumer Price Index (CPI) measures the average change in prices paid by consumers for goods and services over time. The Bureau of Labor Statistics (BLS) publishes the CPI monthly.

There are supply chain disruptions with goods and services, pushing the prices higher. In addition, the oil price has more than doubled since 2016, leading to increased transportation costs for goods and services.

What is the government doing about it?

The Federal Reserve is tasked with managing inflation by adjusting interest rates. When inflation starts to run too high, they typically raise interest rates to try and cool things down. This makes borrowing more expensive, which should help tamp down on demand and reduce inflationary pressures.

What are the two types of inflation?

Cost-push inflation

It happens when the cost of production rises. For example, cost-push inflation can occur if businesses are faced with sudden increasing prices for raw materials, intermediate goods, or labor and pass those higher costs on to consumers. 

This type of inflation may be sustained if it results from a lasting policy change, such as new taxes on foreign-made inputs. Still, it can also be a quick response to an exogenous shock, such as supply chains adjusting to the re-opening of the global economy. The second type is demand-pull inflation.

Demand-pull inflation

It happens when demand for goods and services outstrips the available supply. This can happen because of strong economic growth as businesses expand to meet rising consumer demand; it can also be spurred by excessive money creation (known as “money printing”), making it easier for people to borrow and spend.

What is the Federal Reserve?

The Federal Reserve is the central bank of the United States. Among other things, it is responsible for regulating the nation’s money supply and setting interest rates.

One of the things the Federal Reserve does is try to keep inflation from getting too high or too low. When inflation starts to rise, the Fed may take steps to raise interest rates to bring it back down.

Why should I care about rising inflation?

Rising inflation can have several impacts on borrowers and savers alike. For borrowers, higher inflation can mean that you’ll end up paying more for goods and services over time. Additionally, if you have a loan with an adjustable interest rate, it may start to increase more quickly as inflation rises.

Inflation remains stubbornly high, and the Omicron variant of the coronavirus poses looming uncertainty about what might come next, keeping the pressure on the Federal Reserve and President Biden to do more to tame rising prices. 

The Fed officially targets the Personal Consumption Expenditures price index for 2 percent annual inflation on average over time. Instead, it climbed 5.7 percent in November from a year earlier — the fastest pace since 1982 — the Commerce Department reported Tuesday. Core prices, which strip out volatile food and energy costs, rose a more moderate but still worrisome by historical standards annualized pace of about two percent in November.

The Fed’s preferred inflation measure has been running above its target for most of the year. Moreover, it shows no sign of retreating anytime soon, raising pressure on the central bank to take more aggressive action, such as another interest rate cut this month or even quantitative easing.

What can borrowers do to protect themselves from rising inflation?

There are few things borrowers can do to protect themselves from rising inflation. One is to try and lock in fixed rates for as long as possible. This will help shield you from the increase in prices over time. High inflation has been sapping consumer confidence as people face rising costs, so it is important to remember that you can take steps to insulate yourself from its impact.

Additionally, be sure to keep an eye on your budget and make changes where necessary so that you can continue to afford your monthly payments even if prices rise.

Finally, stay diversified with your investments, and don’t put all of your eggs in one basket. This will help ensure that you won’t lose everything if inflation does cause a loss in value for one investment vehicle.

What is the current trend of rising prices across the country?

This 2022, the average inflation rate has been at an alarming level, with prices rising month-over-month. Earlier in the year, there were predictions that rates would decrease as we entered the latter half of the year. However, this does not seem to be the case so far. Last month saw a jump in prices for goods and services ranging from transportation to medical care.

According to CNN’s Kaitlan Collins, Biden told reporters that “the reason for inflation is that we have a supply chain problem that is severe.” Others, though, are concerned the problem is more significant than that. For example, former Treasury Secretary Larry Summers has also pointed to government spending as a reason for increased inflation and believes it’s far from a bump in the road.

What do surging inflation and interest rate hikes mean for borrowers?

If you have credit card debt, expect to pay more interest when the Fed raises interest rates. Typically, credit card interest rates rise and fall in line with the federal funds rate, so you’ll likely owe more in interest on that credit card debt when the hikes happen. Mutual funds, meanwhile, may not be as attractive to investors if rates continue to go up.

Auto loans and mortgage rates are also likely to become more expensive. As a result, savers may benefit in the short term from rate hikes, but over time they could see a decline in the value of their savings if inflation continues to surge. The stock market may also be impacted, as investors shift their money away from riskier assets into safer investments like government bonds.

What about savers?

A tight labor market has further fueled inflation,” says Leah Hartman, a finance and economics lecturer at the University of New Haven’s Pompea College of Business. “We’ve had global supply chain shortages. Pricing is crazy, and it’s especially hurting low-income consumers.” The recent inflation surge has worried some investors.

On the other hand, these inflationary pressures could mean some difficult times ahead for those who are trying to save money. When prices are increasing while interest rates remain relatively low, it can be tough to make any real headway on accumulating wealth over time. This is something that the government will need to consider as it weighs its next steps in terms of monetary policy.

What is the government’s next step?

The Federal Reserve has already signaled that it plans to raise interest rates at its next meeting, set for the end of this month. While some policymakers advocate for a more cautious approach, there seems to be a growing consensus that hikes are necessary to combat inflation.

At the same time, the Fed is also considering ways to reduce its balance sheet, which has grown significantly in size over the past decade. This could include selling off some of the assets that it has acquired over the years.

How might things change going forward?

If inflation continues to surge, the government may take additional steps to try and contain it. This could include further interest rate hikes or even changes to how Social Security payments are calculated.

It’s impossible to say for sure how things will play out from here. However, it seems likely that we could see even more volatility in both the borrowing and saving markets as we move forward. So if you have any plans to take on new debt or save for the future, it’s essential to stay ahead of the curve and be prepared for whatever may come.

How did the government intervene to help savers?

The government has intervened to help savers in a few ways. One way is by increasing interest rates on their savings account, certificates of deposit (CDs), and other fixed-income investments. This makes it more profitable for people to save money.

The government has also made it easier for people to invest their money in stocks and other securities. This allows people to benefit from the stock market’s growth without having to risk losing any of their money.

Finally, the government has provided tax breaks for people who save money. This encourages people to put more money into savings accounts and CDs. All of these measures should help protect savers from the effects of inflation.

What are the ways to protect your money from inflation’s effects?

The government may have to take additional measures to try and control the situation. For savers, this could mean changes to interest rates or even a shift towards investing in assets that are less likely to be impacted by inflation. So it’s essential to stay up-to-date on the latest news and make sure your money is protected no matter what happens.

Borrowers should continue watching for fluctuations in the market and make moves accordingly. Remember, it’s always best to speak with a financial advisor before making any significant decisions regarding your money. Stay safe out there!

What are some tips for living a frugal lifestyle in today’s economy?

Some people may be tempted to go on a spending spree when they see the cost of goods and services rising, but this is not the best course of action. Instead, try some of these tips for living a frugal lifestyle:

  • Make a budget and stick to it. As a consumer, please don’t go out and stockpile because you’re afraid that gas or food prices might go up as it only causes more inflation.
  • Shop around for the best deals on everything you buy.
  • Avoid impulse purchases.
  • Cancel unnecessary subscriptions or memberships.
  • Brown bag your lunch instead of eating out every day.
  • Use public transportation or walk instead of driving everywhere you go.

By following these simple tips, you can save yourself a lot of money in the long run. And who knows? You might even find that you enjoy living a more frugal lifestyle!

Bottom Line

Inflation is on the rise, and the government may take additional measures to try and control it. For savers, this could mean changes to interest rates or even a shift towards investing in assets that are less likely to be impacted by inflation. However, borrowers should continue watching for fluctuations in the market and make moves accordingly. Remember, it’s always best to speak with a financial advisor before making any significant decisions regarding your money. Stay safe out there!

Don't miss out!

Sign up to our mailing list to get updates on new products and content as they arrive.