I keep reading how inflation is out of control.  Why is this happening and is there anything I can do to protect myself?

– James Moore

Hi James, since 2022, inflation has been on the top of all our minds, and it’s a topic of a lot of conversations we have heard in the news.  First, it is important to understand that inflation is driven by a supply-and-demand imbalance, which occurs when consumers are looking to purchase more goods or services than are available.  The two options for suppliers to meet this increased demand are to produce more goods or to raise prices on current goods because they are unable to produce more.  In most cases, producers choose the latter option.

Our current inflation situation is being driven by several factors.  First, we have the ongoing conflict in the Middle East, which is causing less oil to flow through the Strait of Hormuz, consequently lessening the supply of oil and pushing prices higher.  These higher prices not only affect the price of gas we put in our vehicles, but also the prices of other physical goods as companies need to pass on the extra fuel costs for shipping those goods across the country.  We are also experiencing excessive demand from consumers.  Whether it is from travel or going out to restaurants, there seem to be plenty of people moving about.  While consumer prices are affected by the higher fuel prices, companies also attempt to find a sweet spot where they can charge people more without losing customers to those higher prices. An additional component we’re seeing add to the inflation landscape is the current buildout for artificial intelligence (AI).  Companies are spending billions of dollars on data center construction and equipment associated with AI.  The suppliers to the AI industry cannot meet demand and are being forced to continue increasing prices on those goods and services.  In all these instances, we do not see a definitive end in sight at present.

This is not to say we expect to see hyperinflation, but we are in the camp that believes consistent inflation will stick around longer than we would all like.  The concerns with longer-term inflation are that it eats away at the value of our cash so that we cannot purchase as much tomorrow as we can today.  The first thing that you can do to help battle this inflation prolongation is to ensure any idle cash you have is in an account that is earning interest.  Typical money market products can earn 3.% to 3.5% at most banks and are easily accessible without lockups or penalties.  CDs will have a very similar return, requiring short-to-long-term lockups.  For the long term, the stock market has always been the best place to outpace inflation and grow the money you do not need over the short term.  There are certainly risks in this area, and it might be best to consult a financial professional to understand your level of risk tolerance before making any investment decisions.

John McGowan, CFA, MBA, of Carson Wealth will answer select reader-submitted questions and offer professional insights on investing, retirement planning, estate planning, taxes and other personal finance topics.

Have a financial question you’d like addressed in a future column? Email your question to Pittsburgh@carsonwealth.com. Selected questions may be featured in an upcoming edition.