Living Expense

Inflation has averaged 5.3% over the past 30 years. At this pace, this is what you could expect to pay in 2027:

Little change in inflation rate can have a big impact. Let's see the difference between a 4% and a 2% annual inflation rate in the US:

Retirement

Suppose a retired person has $1 million in government bonds paying 6%. The person would get $60,000 a year in interest income. With 2% inflation, $20,000 of that interest payments would have to be reinvested to keep the $1 million portfolio from losing value, leaving just $40,000 to live on. If the inflation is 4%, the retiree would have to reinvest $40,000, cutting spendable income in half.

Mortgage

When the inflation goes up, mortgage rates go up accordingly. For a 30-year, fixed-rate mortgage, if the rate is 7%, the monthly payment on every $1,000 borrowed is $6.65. If the rate is 9%, the monthly payment would be $8.05.

Stock Market

Higher interest rate:

• makes it more expensive for companies to borrow, buy raw materials and hire workers;
• means that every dollar in profits is worth less;
• makes alternate investments such as bonds more attractive.

What Should You Do When Inflation Goes Up?

• Revise financial plan to account higher interest rate;
• Reduce or eliminate credit card debt;
• If you are thinking about buying a house, evaluate the interest rate perspective within your time horizon. If you cannot wait until the interest rate goes down, you don't have much choice. 
• Re-evaluate your investment portfolio. The risk of certain stocks may go up. Safer investments such as federally-insured CD's may become more attractive.