Understanding Inflation

Inflation is the rate at which the general level of prices for goods and services rises over time, which correspondingly decreases purchasing power. When inflation is 3% per year, something that costs $100 today will cost $103 next year. Over 20 years at that rate, it will cost $180.61.

The U.S. Federal Reserve targets an annual inflation rate of approximately 2%. Historically, the long-term average U.S. inflation rate has been around 3.1% per year. During periods of high inflation (such as the 1970s or 2021–2023), rates can exceed 7–9%, dramatically accelerating the erosion of purchasing power.

How to Protect Against Inflation

  • •Invest in equities: Historically, the stock market has returned an average of 7–10% annually, well above inflation.
  • •TIPS (Treasury Inflation-Protected Securities): U.S. government bonds whose principal adjusts with inflation.
  • •Real estate: Property values and rents tend to rise with inflation over the long term.
  • •I-Bonds: U.S. savings bonds that pay interest tied to the inflation rate.