Inflation has become a significant challenge for households across all income levels. Even those who considered themselves financially stable in the past are feeling the squeeze. While inflation has slowed down since its peak, the prices for many everyday goods and services remain high. To help maintain a strong financial outlook despite rising costs, here are some strategies you can implement.

The Persistent Impact of Rising Prices

Starting in 2020, the pandemic sparked a surge in consumer prices, which has continued to affect the cost of living. Although the Consumer Price Index (CPI) inflation rate has decreased from 9.1% in mid-2022 to 3.1% by November 2023, many goods and services are still much more expensive than they were just a few years ago. Even those with higher incomes are feeling the pinch—55% of people earning $100,000 or more reported that their wages haven’t kept up with inflation, according to a recent survey by Bankrate.

Consumers Continue Spending Despite Inflation

Despite rising prices, consumer spending remains strong, even showing a modest increase of 0.2% in November 2023. Consumers ended 2023 with increased confidence in both the business and labor markets, which suggests that, for now, economic optimism remains intact, despite higher costs.

Inflation and Long-Term Planning

Inflation affects not just daily expenses but also long-term financial goals, including retirement. It’s important to consider inflation when creating your wealth plan to ensure you’re prepared for the rising costs of living as time goes on.

Smart Asset Allocation

To protect against inflation in the long term, it’s crucial to include assets in your portfolio that can help you stay ahead of price increases. Diversifying your investments is key to ensuring you have a well-balanced strategy. Your wealth advisor can work with you to recommend investment options that are designed to withstand inflationary pressures while still helping you achieve your financial goals.

Maintaining a Healthy Saving Habit

During times of inflation, it’s tempting to cut back on savings in order to manage higher living costs. However, reducing savings can have a negative impact on your ability to meet long-term financial objectives. Your wealth advisor can help you determine the right savings rate for your goals and help you adjust your budget to balance your spending and saving in a way that still supports your future needs.

Managing Investment Risk

While it’s natural to focus on hedging against inflation, overreacting can lead to increased investment risks. For example, concentrating too much on commodities or Treasury inflation-protected securities (TIPS) may not provide the diversification needed to manage risks effectively. Staying properly diversified across different asset classes will help protect your investments and ensure you’re still able to grow your wealth despite inflation.

Addressing Interest Rate Risks

Inflation often leads to higher interest rates, which can increase the cost of debt. It’s important to be mindful of how rising interest rates may affect your borrowing costs. Your wealth advisor can assess your debt situation and suggest strategies for managing it, helping you maintain a healthy balance between your assets and liabilities.

Partnering with Your Wealth Advisor

The Federal Reserve’s December 2023 report highlighted that while inflation has eased, it remains a challenge. Despite the discomfort inflation brings, there are strategies you can use to protect your financial well-being. By working closely with your wealth advisor, you can evaluate how various inflation scenarios might impact your finances over the long run. Your advisor will help you implement strategies to safeguard and grow your wealth, ensuring a secure financial future despite economic uncertainties.