What we say
Inflation is when prices increase. When prices increase, the value of the dollar decreases.
What Chance the Rapper says (in his song, No Better Blues)
"I hate inflation, hate the store/I hate to choose/hate the war"
What we can learn about inflation
Inflation makes everyone groan, and Chance the Rapper isn’t the only one who hates it. Because inflation means your dollar buys less and less at the store and on the stock market. Inflation also impacts interest rates, so dollars that sit in your savings account or in bonds are worth less over time.
Governments and the U.S. Federal Reserve bank control interest rates and the supply of money in the American Economy. Inflation isn’t all bad, as it keeps interest rates above zero and allows governments to lower interest rates in times of economic crisis (like the 2008 recession.)
The financial lessons
1. To combat the effects of inflation, it is important stock-market wise to maintain a diversified portfolio of stocks (which hedge well against inflation) and bonds (which do not.)
2. Instead of keeping your money in a savings account that doesn’t earn any interest, place it in a high-yield savings account (HYSA). If you have a HYSA with a 3% or higher APY (annual percentage yield), you’re helping to offset inflation with your cash growing in value, rather than losing value.
Check out a playlist of tunes related to this week’s topic below!