You may have heard inflation is rising. But what does that actually mean?
Basically, inflation means prices are going up on things we buy regularly, like gas, groceries and clothes. For the last couple years, the inflation rate has hovered under 2 percent, but it's on the rise.
In May 2018, one inflation indicator—the Commerce Department's index for personal consumption that excludes food and energy costs—rose 2 percent, hitting a level it hadn't reached since April 2012. This inched up the core U.S. inflation rate to 2.24 percent.
While that doesn’t mean you’ll see higher prices on every item you buy, you may notice your grocery bills are getting a little bigger—and it costs more to fill up your car.
How is inflation measured?
Through a few different indexes. Most relevant for us is the Consumer Price Index (CPI), which tracks the cost over time of 175 commonly-purchased goods and services, from shelter and transportation to health care.
Is 2.24 percent a lot?
Back in the 1970s, prices in the U.S. were increasing at a rate of 10 percent or more, so relatively speaking, around 2 percent is pretty low.
The inflation rate is growing at more than 10 percent now in some countries like Egypt, Argentina and Haiti. But don’t worry—it’s unlikely to climb anywhere near that high in the U.S. now. And economists say some inflation is actually a positive thing because it indicates a healthy economy.
So, how much higher will prices go?
Jay Hatfield, founder of InfraCap, doesn't forecast a significantly higher inflation rate this year or next. But recently enacted tariffs could drive up prices on things like cars, beer and soda cans and appliances.
Is there anything I can do to prepare?
You can adjust your budget a little to account for rising prices. But the more important step is to make sure the money you set aside for your future is growing at a faster rate than inflation.
While that’s a challenge with savings accounts, some banks and credit unions are offering accounts with yields of 1.8 percent a year or more. Once you’ve got enough in a savings account to cover short-term goals and unexpected expenses, investing additional money in stocks and bonds is a good way to beat inflation—large stocks have returned close to 10 percent on average over the last century, while long-term government bonds have offered average returns of 5.6 percent, according to research firm, Morningstar.
This post was updated on July 2.