If you follow financial news at all, or even just the nightly news, you have probably heard experts talk about the economy’s inflation rate. It can sound alarming, but the basics are not always explained. Inflation can affect how you save and invest over time. Here is what it means and how it may influence your long-term goals.
What Is Inflation?
Inflation is the steady rise in the average price of goods and services over time. It is often driven by supply and demand. Prices usually rise when demand increases or when supply decreases.
As prices go up, the buying power of a dollar goes down. For example, if a bicycle costs $100 today and inflation is 6 percent, that same bicycle could cost $106 next year, assuming the price rises at the same rate.
In 1965, a dollar stretched much further. The median home price in the United States was $20,200, and a year of undergraduate tuition at the University of Pennsylvania was $1,570.1,2 Over time, wages and prices have increased, which has pushed the overall price level higher. As a result, each dollar buys less than it did in the past.
According to the Bureau of Labor Statistics, the inflation rate from January 2025 to January 2026 rose by more than 2.4%. This rate can rise or fall depending on economic conditions.3
How Can Inflation Impact Savings?
Inflation can reduce the value of your savings over time because future prices may be higher. This is especially noticeable with cash. If you keep $10,000 in cash and do not invest it, that money may not buy as much 20 years from now. Even though the dollar amount stays the same, its buying power declines.
When you keep money in a bank account, you may earn interest. That interest can offset some of inflation’s effects. When inflation is high, banks often raise interest rates. Even so, your savings may not grow fast enough to fully keep up with rising prices. As a result, your buying power can still shrink.
How Can Inflation Impact Investments?
The effect of inflation on investments depends on the type of asset you own.
Fixed-Rate Investments
Investments with a set return, such as traditional bonds or certificates of deposit, can lose value in real terms during periods of inflation. If you receive $100 in interest each year, that $100 may buy less over time as prices rise.
Stocks
Inflation can have mixed effects on stocks. Inflation often rises when the economy is strong and consumer demand is high. In that case, companies may sell more goods and services, which can support stock prices.
However, companies may also face higher costs for wages and materials. These higher expenses can reduce profits. The impact of inflation on a stock depends on how well the company manages these pressures.
Different types of stocks can respond differently to inflation. For example, companies with strong current earnings or pricing power may perform differently than companies whose value depends heavily on future growth expectations.
Commodities
Some commodities, such as oil, agricultural products, and precious metals, have historically performed well during periods of higher inflation. As the value of the dollar declines, it takes more dollars to buy the same goods. Because of this, some investors use commodities to help offset inflation risk.
Inflation-Indexed Investments
Certain investments are designed to adjust with inflation. For example, Treasury Inflation-Protected Securities (TIPS) increase in value as inflation rises. Some annuities and bonds also offer inflation-linked features, usually for an added cost. These options aim to provide returns that adjust with changes in inflation.
How Can You Plan for Inflation?
Inflation is one reason many people avoid keeping all their money in cash. Over time, rising prices can erode the value of savings. To address this risk, some investors include diversified equity investments and other assets with long-term return potential. Over long periods, broad stock market exposure and certain real assets have historically outpaced inflation, though they also carry the risk of loss.
Asset allocation also plays a role. Fixed-income investments, such as bonds or fixed annuities, can be more sensitive to inflation. To diversify, some investors add assets like gold or TIPS to their portfolios. Asset allocation does not ensure a profit or protect against a loss in declining markets.
The Bottom Line
Inflation is a normal part of the economy, and it affects both savers and investors. Over time, rising prices can reduce what your money can buy, especially if it is held in cash or low-interest accounts. By building a strategy that considers inflation, you can take steps to help your savings and investments keep up with the cost of living and support your long-term goals.
Help protect against inflation by investing in assets that may grow over time. Invest In My Future
Sources
- Median Sales Price of Houses Sold for the United States. https://fred.stlouisfed.org/series/MSPUS.
- Tuition and Mandated Fees, Room and Board, and Other Educational Costs at Penn. https://archives.upenn.edu/exhibits/penn-history/tuition/tuition-1960-1969/.
- Consumer Price Index (CPI) News Release. https://www.bls.gov/cpi/news.htm.
