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If you remember when gas cost $1.24 a gallon, then you already know the basic concept of inflation: Prices rise over time. Why should you care about inflation? The more things cost, the less your money buys over time. Though you can’t control the fact that the cost of the goods and services will keep going up, you can help protect yourself against inflation by investing in assets that have the potential to grow faster than the inflation rate. Here are some things to consider.
The consumer price index is one tool that measures inflation. The Bureau of Labor Statistics calculates the index by collecting data on a sample of goods and services that are representative of the economy as a whole. In turn, the Federal Reserve (the central banking system in the U.S.) uses its influence to try to keep the inflation rate at about 2% a year. (Despite that, inflation rates have fluctuated over the years.)
Understanding how inflation impacts you is very important because a 3% inflation rate might sound low, but if your long-term savings aren’t growing at the same or a higher rate, your funds may quickly be depleted.
For example, if your current monthly expenses are $3,000, they’ll be $4,000 in 10 years if there’s a 3% annual inflation rate. In 25 years at that same 3% inflation rate, your monthly costs would be about $6,200.
The threat of inflation has been somewhat reduced since the economic downturn of 2008, but some analysts expect inflation to play a bigger role as the economy recovers. That’s why planning for inflation’s effects, by managing your spending and preparing for higher costs later, may be even more important in the future.
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Source: U.S. Bureau of Labor Statistics, “Frequently Asked Questions (FAQs)."
This information is provided for educational and illustrative purposes only.
Wells Fargo Wealth Management provides products and services through Wells Fargo Bank, N.A., and its various affiliates and subsidiaries.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. Please consult with your tax and legal advisors to determine how this information may impact your own situation.
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