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How does inflation impact your present and future wealth?

How does inflation impact your present and future wealth?

August 23, 2023

New findings from the Employee Benefits Research Institute (EBRI) indicate that seniors' confidence levels concerning their ability to live comfortable lives once they stop working have changed significantly in the past five years.

EBRI's 2023 report indicates that only 18% of pre-retirees feel confident about their retirement savings. Among those already retired, a mere 27% are sure they'll have enough money to last them a lifetime.

Inflation is one of the most commonly cited reasons for seniors' concerns about running out of money. 42% of retirees and 29% of working seniors list inflation as a factor in their uncertainty about the future.

Everyone talks about inflation, but what exactly is it?

Inflation is one of many economic terms that frequently finds its way into television news, internet headlines, and everyday conversations. The classic definition of "inflation" is a persistent uptick in the price levels of goods and services over time. However, inflation's effects extend far beyond mere price hikes. Inflationary cycles influence economies, creating both societal and individual issues.

In this article, I'd like to pull back the curtain on the multifaceted phenomenon of inflation, explore its causes, and consider its potentially detrimental impact on wealth and savings.

Inflation is not a new concept; it has been a recurring economic phenomenon, probably for as long as we've had human commerce. At its basic level, an economy's interaction of supply and demand creates inflation. Prices will often rise as the demand for goods and services surpasses supply. However, other causes of inflation may be more nuanced and perhaps magnified by government economic policies, such as increases in the money supply. Multiple other factors can amplify or mitigate the effects of inflation on an economy and, ultimately, on you.

Causes of Inflation

Financial pundits tend to over-generalize when discussing inflation, lumping all kinds of inflation into one broad category.

However, the reality is more nuanced.

There are, in fact, several different descriptions of inflation, including:

  1. Demand-Pull Inflation: When aggregate demand outpaces aggregate supply, you may experience "demand-pull" inflation. Demand-pull may happen during periods of robust economic growth and increased consumer spending. This situation then leads to competition for limited resources, driving up prices.
  2. Cost-Push Inflation: Rising production costs, such as increased wages or raw material prices, may create "cost-push" inflation. In this scenario, businesses pass on their elevated costs to consumers, leading to higher prices for goods and services.
  3. Monetary Factors: The Federal Reserve plays a crucial role in mitigating inflation through the formulation and execution of monetary policy. When the Fed prints excessive amounts of money or artificially maintains low interest rates, you often have excess money chasing the same amount of goods. This chase after goods drives prices higher.
  4. Supply Chain Disruptions: As we've experienced in the years during and after the Covid-19 pandemic, disruptions in the supply chain may cause prices to surge. Supply chain disruptions could be due to natural disasters, geopolitical tensions, fuel costs, or political upheaval. As you know, these breaks in global supply chains often result in shortages.

Prices then surge due to reduced availability of goods.

  1. Inflation Expectations: Public perception of future inflation can influence current price levels. When individuals anticipate rising prices, they often demand higher wages, causing a cycle of wage-price spirals.


How can inflation impact your wealth and retirement savings?

The ramifications of inflation are complex and extend beyond its immediate effect on the cost of everyday items. Inflation changes how many individuals save and spend their money. Rising inflation may contribute to keeping seniors in the workforce longer than they may have wanted. It can also cause people to postpone everything from home renovations to medical procedures as they try and hang on to as much of their savings as possible. Some families may find creating an emergency fund nearly impossible.

Some of the more apparent effects of inflation include:

  1. Inflationary cycles erode the value of your money. Inflation makes the money you earn worth less and less over time. As overall inflation increases, each dollar buys fewer goods and services. This situation slowly lowers a person's standard of living. When high inflation occurs, individuals and families strain to make their budgets cover recurring expenses. Emergencies, even small ones, can cause finances to go completely sideways.
  2. Inflation can redistribute wealth: Inflation may redistribute wealth in unexpected ways. For example, debtors benefit from inflation as they repay loans with money that has decreased in value. On the other hand, savers and creditors are punished as the actual value of their savings diminishes.
  3. Inflation creates economic uncertainty. Unpredictable inflation levels tend to foster economic uncertainty. Businesses find it challenging to plan for the future when the value of money is in constant flux, leading to hesitant investments and reduced economic growth.
  4. Investors are influenced by inflation. Inflation can influence investment decisions. Traditional safe-haven assets like cash and bonds typically lose value during periods of high inflation. When this happens, investors may seek assets that could outpace inflation, such as stocks, real estate, or commodities.
  5. Inflation can change how you plan your retirement. Inflation poses a significant challenge to retirement planning. Long-term savings intended to sustain you when you stop working may be insufficient due to high inflation.

What are some of the broader implications of runaway inflation?

Inflation's impact extends far beyond individual wallets and bank accounts. It intersects with various facets of the economy and society at large.

  1. Inflation may exacerbate social inequality: People with higher incomes and assets are usually better positioned to weather the effects of inflation. People with lower incomes and limited assets may experience increased financial hardships.
  2. Inflation creates policy trade-offs: As they attempt to battle inflation, governments, and central banks often face trade-offs.

Aggressive measures to curb inflation, such as raising interest rates, could dampen economic growth and lead to spikes in unemployment. Striking the right balance is challenging.

  1. Inflation could reduce international competitiveness: High inflation sometimes affects a country's global competitiveness. When a nation's currency loses value, its exports may become more attractive.

However, imports become costlier, creating trade imbalances.

  1. Inflation affects politics: Runaway inflation that lasts for a long time will likely undermine a country's political stability. Declining standards of living may lead to social unrest and political turmoil.


Yu's Views:

More than just a rise in prices, inflation is a complex economic phenomenon with far-reaching implications. Beyond the immediate impact on everyday budgets, inflation touches wealth, savings, investment behavior, and even political stability. Central banks often cannot maintain a balanced approach to managing inflation as they attempt to promote economic growth while maintaining price stability.


Fortunately, specific products, protocols, and strategies can help if you are a retiree or pre-retiree. I discuss these inflation-busting approaches in my latest book, "Fortify Your Financial Kingdom." To reserve your free copy, contact me today or visit my website