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 likely keep going up, you should factor the effects of inflation into your overall planning strategy. Here are some things to consider.

Measuring inflation

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 manage economic growth and the inflation rate.

Understand the impact of inflation

Inflation impacts the cost of goods and services over time. For example, if your current monthly expenses are $3,000, they’ll be almost $3,600 in 10 years if there’s a 2% annual inflation rate. In 25 years at that same 2% inflation rate, your monthly costs would be more than $4,800.

When considering your investments, it's important to consider whether your investments have the potential to at least keep pace with the rate inflation so that you can have the same or more purchasing power in the future.

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