Think about natural disasters for a moment. Earthquakes happen suddenly and cause immediate damage, while erosion works slowly over many years. Both can harm your property, but they require different ways to protect yourself. Money matters work the same way – some financial challenges hit fast and hard, while others creep up on you slowly. Rising prices, also called inflation, can work both ways. Sometimes prices jump quickly, and sometimes they rise bit by bit over years.
If you remember the high inflation of the 1970s and early 1980s, or the price jumps after COVID-19, today’s situation might seem familiar. Right now, inflation is hanging around longer than many people hoped it would. There are also worries that tariffs (fees on imported goods) might push prices higher. But at the same time, people have jobs, they’re spending money, and companies are making profits. This creates a tricky situation for both investors and government officials who try to balance economic growth with stable prices.
Instead of waiting for inflation to become a bigger problem, smart long-term investors should build investment portfolios that can handle different situations while staying focused on their money goals. What can recent inflation numbers teach us about the economy and investing?
Rising prices eat away at your buying power over time
Most people who invest, save money, or are retired know that beating inflation is one of the main reasons to invest. You need to keep up with rising prices so your money can buy the same things in the future that it can buy today. This is true whether you invest in stocks, bonds, bank certificates, or other investments. The chart above shows this clearly. Something that cost $1 one hundred years ago now costs $18. You can also see that prices rose faster in the 1970s and again recently.
Looking at this, you might think that zero inflation – or even deflation where prices go down – would be helpful. But inflation isn’t just about what we pay for things. It’s also about how healthy the overall economy is. Most economists believe that a low but positive inflation rate of around 2% creates the best balance for people and the economy.
A moderate inflation rate gives central banks (like the Federal Reserve) room to use monetary policy. This means they can encourage people to spend and invest when the economy needs it. Also, some inflation helps prevent the economy from falling into deflation spirals. This happens when falling prices make people wait to buy things because they expect even lower prices later.
So it’s important to understand the difference between personal and economy-wide effects. While 2-3% inflation might help the economy grow in a healthy way, even this moderate level can hurt savers. These rates might seem manageable compared to the double-digit inflation of the 1970s or recent post-pandemic jumps, but they still add up over time.
For instance, with just 3% inflation each year, the cost of things doubles roughly every 24 years. This means that $100,000 of buying power today would need $200,000 in two decades – which is about how long the average retirement lasts. This erosion is especially hard on retirees and people keeping money in cash. For all investors, inflation creates a “hurdle rate” – their investment returns need to be higher than inflation to actually grow their wealth.
Inflation keeps sticking around
In today’s inflation environment, many people worry about the sudden impact that tariffs might have on prices. The latest Producer Price Index report shows that the prices businesses charge jumped in July. Wholesale prices (what businesses pay for goods before selling them to consumers) surged 0.9% – the biggest monthly increase since June 2022 and much higher than economists expected. Goods prices rose 0.7% during this period, while services jumped 1.1% in just one month.1
These numbers matter because increases in wholesale prices often show up in consumer prices several months later, as inflation moves through the supply chain. This suggests that companies have been absorbing some tariff costs so far but may start passing higher prices on to customers.
The latest Consumer Price Index report shows a less dramatic price increase but still confirms that inflation is stickier than many would like. These recent numbers show that prices rose 2.7% over the past year for overall inflation, or 3.1% when you exclude food and energy prices (which have been flat or falling). Much of this increase came from higher shelter costs (the cost of housing).2
While these numbers help us understand the economy in general terms, they also directly affect everyday household budgets. The price increases are showing up where consumers notice them most: restaurant meals rose 3.9% over the past year, medical care 3.5%, and car insurance jumped 5.3%. Even household items like furniture have risen 3.4%, adding pressure to family budgets that have already been stretched by years of higher prices.
Staying ahead of inflation requires smart investment choices
While these increases are significant, inflation is still much lower than the double-digit rates we saw from 2021 to 2022. However, even if tariffs don’t cause sudden price jumps, they may raise the average level of prices over time, eating away at the value of cash. This is especially true if wage increases don’t keep up with price increases, and if investors don’t have long-term investment mixes that can beat inflation rates.
So it’s important to understand what inflation means for investment portfolios. The chart above shows that the average interest earned on cash hasn’t kept up with inflation. Also, the amount of money held in money market funds (a type of safe, short-term investment) is still at all-time highs of $7.1 trillion, even as short-term interest rates have gone down.3
While past performance doesn’t guarantee future results, history shows that both stocks and bonds have beaten inflation over long periods, as shown in the first chart above. However, stocks can be volatile during inflationary periods, as we saw in 2022. This is why having a balance of different investment types that can handle both inflation and periods of ups and downs can help investors stay on track.
Most importantly, investors should resist the urge to make big portfolio changes based on monthly inflation reports or worries about tariffs. While it’s important to make sure portfolios are positioned for different scenarios, overreacting to short-term data often leads to poor timing decisions that can derail long-term financial goals.
The bottom line? Inflation’s gradual erosion of buying power is a key investment challenge. Having an appropriate portfolio that can generate income and growth is the best way to reach financial goals.
Sources:
1. https://www.bls.gov/news.release/ppi.nr0.htm
2. https://www.bls.gov/news.release/cpi.t01.htm
3. https://www.ici.org/research/stats/mmf