How Does Inflation Impact Your Money?

Inflation can impact your money in several ways:

• It can decrease your buying power, which decreases your ability to save and can force you to use your savings.
• In response to inflation the federal government has been raising interest rates, which cuts two ways: It increases the cost of borrowing for you but banks will raise the interest rates on savings and CDs.
• The IRS can adjust tax numbers in response to inflation.

Decreases Your Buying Power

With increasing inflation, your money's purchasing power decreases. So, you have to spend more money for the same items at the grocery store.

Decreases Your Ability to Save

By increasing to cost of every day goods, inflation leaves less money in your pocket, which means your ability to save money decreases.

"More than half, or 54%, of adults said they had stopped saving for retirement or reduced their contributions because of inflation, according to an online poll of 1,004 adults taken in September by insurance provider Allianz Life," reports Kate Gibson.^[1]

But even though inflation makes it harder to save more, you will need to have more saved to live comfortably in retirement.

Note, however, that every dollar you can save can work harder for you in a savings account or certificate of deposit since banks will raise interest rates.

Can Force You to Use Your Savings

The increasing cost of daily goods can also force you to dip into your savings.

"More than a quarter [of adults] also reported having to dip into their retirement savings to keep pace with everyday expenses," informs Gibson.^[2]

Increases Interest Rates

To fight inflation, the federal government has been raising interest rates.

Higher interest rates can make some things more costly, such as when:

• The interest rate on credit cards and other variable-rate debt increases.
• Insurance companies increase premiums.
• The interest on a mortgage increases for people buying real estate (including first-time home buyers and real estate investors) and for people who have variable rate mortgages.

But higher interest rates can also help you since banks raise interest rates for savings accounts and certificates of deposit.

Changes Tax Numbers

The IRS can make inflation adjustments to several tax numbers. Some of these adjustments can keep more money in your pocket, and these include raising:

• The standard deduction
• Federal tax brackets
• The cap on some income tax credits
• The annual exclusion for gifts
• The unified estate and gift tax exemption
• The limit for retirement contributions

But other IRS inflation adjustments can take money out of your pocket, such as raising the maximum salary that is taxed by Social Security.

Resources on the Impact of Inflation on Your Money

Liz Weston, Sneaky wasy inflation impacts your money in 2023, CBS News, Jan. 9, 2023 (Apple News link).