What Is Inflation and How Can You Protect Yourself Against It?

Inflation. It’s a word we hear often at the moment. But how many people really understand what it means? And even more importantly, how many of us know how inflation will affect us personally, and what we can do about it?

A measure of the increase in prices of goods and services over time, inflation is a natural part of any economy, and not generally something to fear. But when inflation is high, it can have a significant impact on us as consumers, changing the way we use our income and curtailing our ability to save money.

So let’s take a look at what inflation actually is, and some simple measures we can take to ensure our financial security isn’t derailed by inflation.

Defining Inflation for 2023

Inflation for the year ahead can be a tricky topic to speak on definitively. Factors such as consumption, technological advancements, the war in Ukraine, and the overall health of the global economy are expected to play a role in determining the actual inflation rate.

Here’s what some of the folks at the top are saying:

  • The Federal Reserve has stated that it expects inflation to remain around 2% over the long-term, but it could fluctuate this year as the effects of higher interest rates on the economy start to kick in.
  • Economist and former Federal Reserve Governor, Kevin Warsh, predicts that inflation will moderate in 2023 due to the slowing economy. He states that inflation could grow at 2.5% to 3% by the end of 2023.
  • On the other hand, economist, Robert Shiller, believes that inflation will remain low in 2023 due to technological advancements that are causing prices to decrease in certain industries, along with the potential for a global economic slowdown. He predicts that inflation could stay below 2% in the coming year.
  • Treasury Secretary Janet Yellen, said that she expects inflation to moderate in 2023 but will probably not reach levels that would be considered concerning for the economy.

So as you can see, even the experts who are supposed to have all the answers, can’t agree on the answer! But despite a range of varying predictions, the overall consensus for United States inflation in 2023 appears to be that it will likely be moderate, with predictions ranging from 2% to 4%.

That is good news for consumers, but it still seems too high! Just like you, I too have felt it at the grocery store and gas pump.

So how can inflation affect our overall financial health? And what can we do to protect ourselves from it in 2023?

How Inflation Can Affect Us

There are numerous ways that inflation can affect our day to day finances and cause our financial habits to shift. Not all are bad, but three core areas to be mindful of are as follows:

#1. Erosion of Purchasing Power

One of the biggest ways that inflation affects consumers is through the erosion of purchasing power. When prices are rising, consumers are able to buy less with the same amount of money. This can make it harder for people to afford basic necessities, and can also make it more difficult for people to save for future goals like retirement.

#2. Limitation of Financial Preparedness

As young, busy professionals inflation can be particularly harmful, keeping us focused on our day-to-day spending and limiting our ability to care about and prepare for our financial future.

It can be hard enough to develop a saving mentality in our 20s and 30s. Retirement seems so far away, and our youth can blinker us to its urgency. When we are forced to focus on affording each day as it comes, it leaves little to no room for considering the days much further ahead.

#3. Changes in Interest Rates

Another way that high inflation can affect consumers is through changes in interest rates. When it is high, central banks will often raise interest rates to try to slow down economic growth and keep inflation in check.

This can make borrowing more expensive, which can be a problem for people who are looking to take out a loan or mortgage. On the flip side, higher interest rates can also make it easier for people to earn money on their savings as banks increase the interest rates on their savings accounts.

How to Protect Yourself Against Inflation

#1. Stick to a Budget

An important first strategy to combat the effects of inflation is to have a budget in place. By keeping track of your income and expenses, you’ll be better able to identify areas where you can cut back on spending.

#2. Don’t Neglect Savings

As counterintuitive as it may feel, try to save as much money as possible and invest it in assets that are likely to keep pace with inflation. Automate a portion of your paycheck into a savings account. Even if it’s just $50 a month, that can still make a difference. And with interest rates going higher, that means higher interest earned on your savings. Be sure to shop around for the best deals on interest rates when it comes to savings accounts.

#2. Invest Wisely

One of the key ways to fight against inflation is by investing in assets that have the potential to appreciate in value at a rate that outpaces it. For example, investing in stocks or real estate can potentially provide higher returns that are adjusted for inflation. These investments are not without risk and it is important to have a well-diversified portfolio and consider your risk tolerance.

#3. Focus on Paying Down Debt

Another important step is to focus on paying off debt as soon as possible. High interest rates can make it more expensive to carry debt, so it’s important to try to pay off any outstanding loans or credit card balances as quickly as you can. Additionally, consider consolidating your debt to take advantage of lower interest rates.

#4. Boost Your Income

A useful tool against inflation is to boost your income. This can be done through getting a raise at your current job, looking for a higher paying job, or starting a side business. By having more disposable income, you can save more and have more flexibility to make investments that can outpace inflation. However, be careful to avoid lifestyle inflation, which is the tendency to increase your spending as your income increases.

#5. Review Your Policies

It is important to review your insurance policies and benefits to make sure you have adequate coverage. Inflation can affect the cost of insurance and it’s important to review your policies regularly to make sure you are getting the best value for your money.

#6. Be Frugal

Another way to stretch your money further during periods of high inflation is to shop around for the best deals. With technology and the internet, it’s easier than ever to compare prices and find discounts. Additionally, try to buy in bulk when possible, as this can often save you money in the long run.

#7. Seek Professional Guidance

Lastly, consider working with a financial planner who can help you to create a comprehensive financial plan that takes into account the potential impact of inflation. A financial planner can help you to create a plan that takes into account your short-term and long-term goals, and can help you to make informed decisions about how to stretch your money further during periods of high inflation.

Empower Yourself Against Inflation

High inflation can be a difficult challenge for consumers. But rather than agonizing over a single number as a spending power loss to recoup, use the small money moves above to improve your financial position slowly but surely.

By taking small, actionable steps, you can help stretch your money further during these periods, and afford yourself the financial confidence of knowing your finances are well structured to account for inflation in whatever form it takes.

And if you’d like to talk about how Nxt:Gen can help you understand inflation as it pertains to your specific situation, and future-proof your finances, please don’t hesitate to reach out for a complimentary consultation.

Ashley Foster Bio Image
Ashley Foster, Founder of Nxt:Gen
I’m a CERTIFIED FINANCIAL PLANNER™ professional married to an extremely hardworking ER veterinarian. This gives me a unique understanding of the difficulties that veterinarians face, both financially and personally. Learn more…
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Subscribe for accessible advice on how to live fully through financial freedom, plus receive our free download: 5 Simple Steps for Freedom from Student Debt