Inflation reduces purchasing power, meaning your money buys less. Learn practical ways to manage rising costs and protect your budget in our latest blog.

What is Inflation?

Inflation may sound like a complicated economic term, but the idea is simple – it's the general increase in prices for goods and services over time. When prices rise, the purchasing power of your money decreases. Here's an example: Last year a normal grocery trip costs you $75 but the same trip costs $100 today. Inflation results in needing more money to buy the exact same things. 

Inflation refers to the overall trend of prices increasing across the economy, not a price increase for a single good or service. 

Shrinkflation refers to when a product or good shrinks in size but the cost remains the same. This typically happens in the food and drink industry. 

Why Does Inflation Happen? 

Inflation can happen for many reasons but there are two common reasons why. The first is increased demand, also known as demand-pull inflation. This happens when demand is higher than supply. Here's an example: The latest gaming system is released with limited stock and more people want to buy the item than what is available. As a result, prices rise because of higher demand and limited stock.

The other is increased costs or cost-push inflation. This happens when business costs rise and companies pass those increases on to their customers. Here’s an example: Your favorite grocery store faces higher delivery fees for goods because the cost of fuel has risen. As a result, the grocery store raises prices of those items to cover the increased costs for delivery. 

Inflation can also be influenced by:

• Broader economic conditions, including interest rates, consumer spending, government policies, and wars
• Supply problems as a result of a shortage in materials or inventory
• Natural disasters or events that disrupt the production or delivery of goods can make products harder to find

Test Your Knowledge: True or false – inflation is a price increase for a single good or service?

Is Inflation Good Or Bad? 

Whether inflation is good or bad depends on the bigger picture. Answering this question means understanding why inflation matters. High inflation can make everyday essentials including food, housing, and gas harder for people to afford. When inflation stays too low for too long, it can be a sign of a weakening economy.

A moderate amount of inflation can support a healthy economy. When businesses see more demand for goods and services, they may increase production and hire more workers to keep up. This can lead to more jobs, more earned income, and more spending – all of which helps the economy grow and thrive.  

Inflation and Your Budget

Inflation can make spending plans less effective and budgets harder to manage. If your monthly expenses are rising but your income is staying the same, here are a few ways you can reprioritize spending and offset high costs.

• Revisit spending habits: Rising prices can strain everyday spending. Revisit spending habits and look for easy ways to cut costs, such as shopping generic brands, using coupons or canceling nonessential subscriptions and streaming services.
• Delay big purchases: If you can, consider postponing nonurgent purchases until your budget has more flexibility.
• Make practical adjustments: Look for ways to lower costs, such as reducing energy use to help lower utility bills and shopping for less-expensive insurance, cellphone, and internet plans.
• Stay flexible: Economic conditions can change, and your financial plan may need to change with them. Review your budget and adjust savings as needed.

Helpful Tip: Sometimes modifying the way you budget for bills or make payments can provide extra breathing room in your wallet. If a traditional monthly budget is no longer working for you, consider trying the paycheck or half payment method instead. 

What Does Inflation Mean for Your Savings

While inflation affects the cost of items and your purchasing power, it can also affect the growth of your money too. Here's an example: Let’s say you save $100 today and keep it in an account that earns 1% interest. In one year, your total balance will be $101 (you earned $101. But, if the inflation rate is 2%, you would have needed to earn $102 to match inflation and make your money stretch further.

That’s one reason why it’s important to consider high-interest savings accounts to help your money grow and outpace inflation. Depending on your savings goals, accessibility needs and timeline – whether you're saving for short or long-term goals – it's wise to choose an account that matches your financial plan. 

• Money Market Account: A hybrid savings and checking option that typically earns more interest than a traditional savings account. This can be a good option for those who want a safe, low-risk way to save while still getting convenient access to their money. 
• Term Share Certificates (or CDs): A low-risk savings option where you deposit money for a set period of time in exchange for a guaranteed rate of return. This may work well if you're saving for a future goal (down payment on a car or home) and don't need immediate access to your money.
• Individual Retirement Account (IRA): A retirement savings account that helps you save for your future outside of a 401(k) or other employer-sponsored plan. This can be a helpful option for anyone with earned income who wants to build or supplement their long-term retirement savings.
• Berenstain Bears Cub Account: A high-yield savings account designed for children from birth through age 13. This can be a great choice for parents and grandparents who want to help young savers get a head start.

Test Your Knowledge: Which type of account is a hybrid of savings and checking?

a) Term Share Certificate (or CD)

b) Berenstain Bears Cub Account

c) Money Market Account

d) Individual Retirement Account (IRA)

Beat the Bite of Inflation with A Smart Place to Bank

Inflation is a normal part of the economy, and while we can't control it, we can take thoughtful steps to respond. When economic conditions change, you don't have to navigate them on your own.

At Peach State, we’re here to help you protect your finances, plan for the future, and make every dollar work harder. When you understand how inflation affects your budget, savings, and purchasing power, you can make adjustments while staying focused on your bigger goals.

For more information about ways of cutting costs, saving money, and budgeting, check out the resources below.

• How to Save Money on Your Electricity Bill [7 Essential Strategies]
• Realistic Ways Your Family Can Save Each Month
• How to Save Money On Groceries [7 Money-Saving Tips]
• 3 Practical Budget Templates That Actually Work!

Remember, the key to navigating inflation is staying flexible and focused. Your financial plan doesn’t have to be perfect; it just needs to keep moving with you and the economy.

Test Your Knowledge Answers 

• True or false – inflation is a price increase for a single good or service. False, inflation refers to the overall trend of prices increasing across the economy.

• Which type of account is a hybrid of savings and checking? Money Market