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
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.
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.
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.