Impact of inflation on savings is a constant concern for those who invest and think about building wealth in the long term. After all, when prices go up, the amount saved may end up being worth less than you think.
In addition to understanding the impact of inflation on savings, you will know why this happens and how monetary policies are used to literally manipulate inflation.
You will also learn strategies to protect your money, which will help you maintain your purchasing power. Keep reading and understand all these details in a few minutes.
What is inflation?
Inflation is the increase in the prices of goods and services in an economy, which causes the value of money to decrease over time.
Because of this, with the same amount of money, you can buy less than before.
To make it easier to imagine, think about the following situation, in 2024 when you go to the market, with US$ 700.00 you could buy everything you needed to get through the month, but now, in 2025, to make the same purchase you spend US$ 830.00.
See that to buy the same or the same amount, you spent more, that’s what inflation does to your money, but how is the relationship between inflation and savings? This is what we will cover later.
After all, how does inflation impact savings? (Impact of inflation on savings)
Saving money is important to achieve long-term goals. However, during periods of inflation, saving alone may not be enough. This is because, if the yield on your reserve is lower than inflation, your purchasing power will fall over time.
Imagine the following, by leaving US$ 500.00 in savings that yields 7% per year, you will have US$ 535.00 after twelve months.
However, if inflation is 10% over the same period, $550.00 would be needed just to maintain purchasing power. Therefore, despite having more money in the account, when compared to inflation you lost money.
This effect is even more worrying for those who save thinking about big goals, such as their children’s education or retirement. Is this your case?
If so, be careful, as the yield may not keep up with inflation, making your dreams never come true.
Therefore, when we think about inflation, know that your investment should always be above or at least equal to inflation.
What causes inflation to rise?
As a rule, inflation happens due to the law of supply and demand for goods and services grows beyond the economy’s production capacity.
It works like this, when there is more money circulating, whether due to government monetary policies, increased credit or growth in the population’s income, people tend to consume more.
With this, sellers adjust their prices upwards, generating an increase in prices.
But inflation is not always caused only by demand.
Other factors can be decisive, for example, if a change in nature disrupts the agricultural sector, the sale price will automatically be higher. What is the reason for this? Basically, the farmer will need to pass on the loss when buying and pass it on to the other, until it reaches the final consumer (you).
To monitor these variations, the United States government uses indicators such as the Consumer Price Index, which measures monthly the variation in the prices of items such as transportation, health and housing.
Another indicator is the Producer Price Index (PPI), which focuses on the prices paid to producers before the goods reach the final consumer.
Therefore, inflation can arise both from an increase in consumption and from problems in the supply of products. It is important to know that following these indices is important, so as not to be surprised in the market.
Understand how monetary policies manipulate inflation
Monetary policy is one of the tools used by central banks to control inflation and maintain economic stability. In the United States, the Federal Reserve (Fed) aims to keep inflation around 2% per year, measured based on the variation of the price index for personal consumption expenditures (PCE).
When prices start to rise faster than this target, the central bank acts to contain the advance of inflation. This is done through public policies, through the increase in interest rates.
On the other hand, when inflation is too low and the economy begins to lose strength, the central bank can reduce interest rates and adopt expansionary policies.
In practice, monetary policy works as a line that tries to remain stable, when the economy is too heated (the line is unbalanced upwards), interest rates rise; When it cools down (the line is unbalanced downwards), interest rates fall. All to maintain the balance between growth, employment and stable prices.
How to protect your money from inflation?
During periods of inflation, keeping money idle means losing purchasing power over time.
Therefore, they should look for ways to protect their assets, investing in alternatives that exceed or keep up with the rise in prices.
There are several strategies and financial instruments that help savers defend themselves from inflation and the good news is that many of them are affordable. Let’s look at the main ones:
- Accounts that offer higher yield than inflation: Basically, these are high-yield savings or money market accounts.
- Inflation-Protected Treasury Securities (TIPS): they adjust interest payments according to the variation of the Consumer Price Index (CPI), and the amount initially invested is also adjusted for inflation. That way, you are guaranteed to always be in profit.
- Individual stocks, mutual funds, and ETFs: these are more variable investments, and are undoubtedly a great way to seek returns above inflation. As a rule, it is indicated for those who do not have the time or knowledge to choose specific assets, since in this modality they have the support of a specialist.
To invest in the right way, you should look for good investment brokers, some of the best known are:
- Charles Schwab;
- Fidelity Investments;
- TD Ameritrade;
- E*TRADE;
- Interactive Brokers;
- Merrill Edge;
- Vanguard;
- SoFi Invest;
- Webull.
With well-informed choices, it is possible to maintain the real value of your assets and ensure that your financial goals are being achieved. For you who are a total beginner, get to know all the best investment strategies for beginners.
Conclusion (Impact of inflation on savings)
Understanding the impact of inflation on savings is essential to protect your assets and prosper in your life.
As we have seen, inflation slowly erodes the value of money saved, especially when savings yields do not keep pace with rising prices.
Knowing how it works, what causes this rise in prices, and how central banks react to these movements is crucial to making smarter financial decisions.
The good news is that there are ways to protect your finances, such as investing in TIPS, high-yield accounts, or well-structured ETFs.
Whether it’s to ensure retirement, education for your children, or just maintain your financial stability, adopting these strategies will keep you thriving.
