Inflation — The Subtle Thief of Your Purchasing Power

American workers are laboring as diligently as ever, but they have little extra to show for their effort.

Combine meager pay increases with the slow but steady effects of inflation, and it is easy to see how families are barely breaking even.

Workers have been receiving, on average, 2% pay increases for the past three years.1 But when you adjust that increase for inflation, what’s left is negligible. In April of this year, for instance, inflation-adjusted earnings rose just 0.3% from the previous year. In April 2016, wages rose 1.2% annually after inflation, and in 2015 that figure was double — at 2.4% — thanks to near-zero increases in the cost of consumer goods and services at that time.1

Ramping Up?

While inflation rose 2.2% for the 12 months ending in April, policymakers at the Federal Reserve — the nation’s central bank and overseer of our monetary system — expect price increases to level off at the Fed’s annual inflation target of about 2%. Still, with wages following a similar trajectory, workers are left feeling the squeeze in their wallets, despite bigger pay days.

Follow the CPI

The most common measure of inflation is the Consumer Price Index, or CPI. The CPI is based on a monthly survey by the U.S. Bureau of Labor Statistics. It compares current and past prices on a “basket” of common expense categories, including housing, transportation, and clothing.

While inflation has been a constant fact of life in the U.S. economy, it can be particularly damaging to retirees, many of whom are living on fixed incomes. For many, Social Security is the only retirement income that increases through cost-of-living adjustments (COLAs) to reflect any increase in the cost of living as measured by the CPI.

It may be easy to overlook inflation when preparing for your financial future. After all, an inflation rate of just 2% to 3% — which we have been experiencing for the past several decades — may not seem worth noting, until you consider the impact it can have on your purchasing power over the long term.

Consider that at just a 3% inflation rate, a $100,000 nest egg today would be worth only $74,409 in today’s dollars 10 years from now, $55,368 in 20 years, and $41,199 in 30 years.

As you can see from this example, the further away you are from retirement, the more potential inflation has to erode your future purchasing power, and the more important it is for you to choose investments that can potentially help you stay ahead of inflation.

Talk with your financial advisor to learn more about managing the impact of inflation on your investments.

1The Wall Street Journal, “Don’t Feel That Pay Raise? Blame Inflation,” May 12, 2017.