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The Impact of Inflation on Savings and Investments

December 15, 2023
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How Does Inflation Affect Your Savings and Investments?

Inflation affects every part of your daily life. Groceries, tuition, and streaming service prices go up as inflation increases. If daily expenses are rising faster than the money in savings accounts is growing, that can be enough to make people rethink their personal savings plans.

What is Inflation?

Inflation is a complex economic occurrence that happens when purchasing power declines and the price of goods and services goes up. Inflation is mainly measured in two ways:

  • Price Index Approach: This approach measures inflation by keeping track of the prices of items people typically buy. Economists use a formula that compares current costs with the costs of a carefully chosen different period of time. The results show us how much the costs of goods and services have gone up and down.
  • Quality Index Approach: This method considers the goods and services themselves, checking to see if the change in price is due to a change in quality.

The Dynamics of Inflation and its Effects on Savings

It’s universally accepted that inflation is complicated. Economists have argued about different causes and potential answers to gaining power over the economic phenomena, but in some ways inflation is like the weather, impossible to control and hard to predict.

Much like how you’d prepare for an oncoming storm, if you’re informed you can prepare for and react to inflation before getting into deep water. Read on to find out how to get your weather report. You’ll learn a little about inflation’s dynamics, how it might affect the money in your savings accounts, and how to evaluate your fixed-rate investments.

Inflation's Erosion of Purchasing Power

Compound interest is an economic element that can both positively and negatively impact inflation. Whether the effect is positive or negative depends on if the interest you’re earning is more or less than the inflation rate.

If the interest rate you’re earning is higher than the inflation rate, you’re benefiting from compound interest. If it’s lower, that’s when your purchasing power is eroding because compound interest can’t keep up with inflation rates.

Impact on Cash Savings and Bank Deposits

If you’re concerned about the purchasing power of your invested money, you need to calculate the real interest rate of your investment. A real interest rate represents the actual purchasing power gained or lost by an investment when taking the effects of rising prices into account. Real interest rates can help maintain value by providing a more accurate understanding of the return an investment gains as it takes the price of goods and services into account.

Evaluating Fixed-Rate Investments in an Inflationary Environment

Before you decide what to do with your savings during inflation, consider a few things. How long are you planning on keeping your money invested? What are the trusted experts in the field projecting for interest rates in the future?

Here are tips on how to evaluate the two most common fixed-rate investments during an inflationary period.

  • Bonds: Compare the interest stated on the bond with the real interest, or the interest that takes purchasing power into account. Longer-term bonds are more affected by inflation because they’re further from maturity than shorter-term bonds. Basically, a longer-term bond is suffering under poor interest rates for longer that means less interest is compounding on the investment.
  • Certificates of Deposit: Certificates of deposit have a fixed term for investment, meaning you can’t just take your money out of a certificate account when inflation is climbing. While this might mean you may be missing out on capital, some financial institutions offer inflation-indexed Certificates of Deposit, such as DCU’s Jump-Up Certificates. These aren’t as fixed as other certificate accounts and can adjust with interest rates to stem the effects of inflation on your return.

How Does Inflation Affect Your Savings: Mitigating Negative Effects

Inflation is unpredictable. It often affects the types of savings that are considered the safest such as bonds and Certificates of Deposit for the very reason they are considered safe. They don’t fluctuate with the economy. While it’s difficult to see your bottom line suffer due to an economic force, there are ways to protect yourself from future fluctuations. The idea is simple. Don’t keep all your eggs in one basket.

You can mitigate the impact of inflation on investments by spreading your economic risk across asset classes. This can insulate your finances from market crashes that could affect more inflation-resistant investments such as real estate or stocks as well as preventing inflation-affected investments such as Certificates of Deposit from ruining your bottom line.

Those that want an account that will fluctuate with the economy and diversify their investments may be interested in an investment account such as an IRA, these accounts have varied investments that keep up with the economy without needing hands-on attention. While an IRA is reserved for retirement, those looking to build an emergency fund or save for a child’s future might be interested in investing in a money market account which works similarly.

Adjusting Investment Approaches for Inflationary Times

During times of inflation, it’s best to have a passive approach to investments. Even the best economists can’t perfectly predict what will happen next, so diversifying your investment portfolio by investing your funds in a money market or market index account is the best strategy. 

At DCU, our mission is to help our members’ finances flourish in any financial weather. We know inflation impacts the cost of everyday expenses but putting aside money for the future is still important. Responsible saving should be rewarded with healthy dividends, and we’re here to provide them. That’s why we offer some of the highest savings rates in the country*. Check out our Primary Savings and Advantage Savings rates to learn more.

*The national average annual percentage yield ("APY") for savings accounts is updated monthly, please refer to the Federal Deposit Insurance Corporation.

Frequently Asked Questions About Inflation

  • Does inflation impact everyday purchasing decisions?
    Yes. When you notice that prices are rising everywhere you look, your purchasing decisions are naturally impacted. Many people adjust their budget and prioritize the essentials. Others might delay large purchases until prices have decreased or the purchase can no longer be put off.
  • Are all investments equally affected by inflation?
    No. There are certain investments that tend to do better during times of inflation. These can include:
    • Commodities such as silver, gold, and oil
    • Inflation-indexed bonds
    • Stocks
  • Is deflation as concerning as inflation for investors?
    While it comes with a different set of concerns, an interest rate that falls too low can cause economic issues such as tanking housing prices that can cause homeowners to have negative equity in their homes. Just as with inflation, a bank or credit union, and the Federal Reserve have several tactics they can use to address deflation.

  • What is an example of hyperinflation?
    Hyperinflation is a term used when prices are bloated at a pace that’s uncontrollable. Typically, rates over 50% each month over time are considered to be hyperinflated. Hyperinflation especially impacts the cost of essentials such as food and gas.

    In 2023, Argentina saw hyperinflation take over the economy with interest rates hitting 102.5% in February. While the government tried to address the crisis with a cap on the price of basic goods, the inflation rates have left many Argentinians in poverty with zero capacity to put any money in savings.

Inflation-Proofing Your Financial Plan

In times of inflation it’s important to review your finances regularly and adjust your budget as needed. You may want to adjust your financial goals to make sure they’re still where they need to be as the costs of the items you're saving for and your dividends may be in flux.

Financial literacy in times of inflation is more important than ever. Anyone looking to better their financial outcomes can turn to DCU. Our financial education center is available to help you learn more about your personal and family financing. We also offer a range of calculators to help figure out how much you need to save to reach your financial goals, factoring in the interest rates available.

Are you ready to start banking with a credit union that’s dedicated to the health of your financial future? Learn more about becoming a member. DCU can help you weather whatever financial phenomena that might come your way with more confidence.


Please note, membership is required to open an investment or savings account. Visit our membership eligibility page for more information.

This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.