Ahead of the release of the “Truth Hurts” singer’s album Special, a Stash survey found that 10% of respondents would rather be friends with Lizzo than be a millionaire. Stash’s first annual State of Money in America survey asked more than 2,000 people how they feel about the economy and their money right now. 

Being Lizzo’s best friend would probably come with a lot of perks: early listening parties, an invitation to the Grammys, and proximity to Harry Styles, to name a few. For 10% of respondents, those perks outweigh the possibility of putting more money in their pockets, even with inflation at its highest level in decades and Americans facing economic uncertainty. 

You can read more about what else Stash found out when the full report is released in August. Stay tuned! 

The post Be a Millionaire or Be Lizzo’s Best Friend? Find out what Stash’s Survey Says. appeared first on Stash Learn.

That slight uptick in prices can be explained by inflation. Inflation is the rate at which prices for goods and services increase over a period of time. One way inflation is measured is with something called the Consumer Price Index (CPI), which shows the percentage change in prices paid by urban consumers on goods and services. The CPI is produced by the Department of Labor’s Bureau of Labor Statistics (BLS).

Inflation currently stands at 5.3%, according to the September, 2021 CPI. That’s a threefold increase compared to 2020. The increase in prices is thought to be a result of changes to the economy caused by the Covid-19 pandemic, but inflation can happen for a variety of reasons.    

Let’s look at what leads to inflation and what it means for you and other consumers. 

What causes inflation?

Since the beginning of the pandemic, inflation has contributed to rising prices across numerous industries, which has sent prices up for consumers. For example, a shortage of semiconductors, used to power many technologies in cars, as well as an increased demand for vehicles, has sent new car prices higher. That demand for cars is also pushing the price of used cars up, and more road travel has also meant more expensive gas. Food prices and eating out costs are also on the rise. Restaurants are paying workers more amid a labor shortage, and that’s making prices for customers higher.  

The two biggest types of inflation are called demand-pull inflation and cost-push inflation. Remember the rules of supply and demand: supply is the amount of product while demand is the number of people who want the product. Demand-pull inflation occurs when demand increases to a point where supply can’t keep up, increasing prices. When demand slows down, so do price increases. 

Cost-push inflation happens when the price of raw materials or the cost of workers’ wages goes up, and businesses pass those costs on to consumers as price increases. This phenomenon has contributed to the current rate of inflation. The price of lumber, for example, has pushed up house construction prices during the pandemic. With more houses being built, the cost of lumber increased by more than five times in the 14 months following March 2020. 

The Federal Reserve and inflation

Government policy can also have an impact. A country’s central bank can control how much money is available, thereby affecting supply. The central bank of the U.S., known as the Federal Reserve, or the Fed, can affect inflation by increasing or decreasing the money supply. The more money is available, the less each dollar is worth, which can cause inflation. For example, some economists have suggested that the influx of cash into the economy from recent stimulus bills has contributed to pushing prices up. 

The Fed also sets something called the federal funds rate, the central bank’s benchmark interest rate. Changes to the federal funds rate lead to changes in interest rates throughout the economy. So when the Fed reduces that rate, borrowing money for things like a house and on credit cards can become cheaper. However, cheaper loans can also cause costs to go up as demand increases. The Fed also uses this rate to fight inflation, by increasing the rate and making borrowing more expensive. 

A degree of inflation is thought to be normal and healthy because it means the economy is functioning properly. The Fed tries to maintain roughly a 2% inflation rate, and when it goes significantly higher, the central bank may raise the federal funds rate to achieve its target rate. 

However, at the start of the pandemic, the Fed lowered that rate to almost zero percent to stimulate the economy with so-called cheap money in the form of low-interest loans.  The Fed has kept the rate there, and has been hesitant to increase it, since the economy is still recovering. And that may be keeping inflation higher than normal.

What inflation means for consumers 

Inflation has real implications for your wallet. Generally speaking, inflation can reduce the value of your money as costs of goods and services go up. It can also decrease the value of savings in a traditional bank account, especially while interest rates remain low, as they are now. And if you invest in bonds, inflation can also affect the value of that investment, since interest payments on bonds are fixed. Over time, with inflation, those payments will be worth less.

In the current inflationary period, energy prices have experienced a 25% increase year over year, according to the BLS. Within energy, fuel oil prices increased by more than a third, and gasoline prices by more than 42%. Meanwhile, natural gas prices have gone up by 21.1%. 

Source: BLS

At the grocery store, prices have also risen 3%. The three areas that have experienced the biggest jump in prices are meat, poultry, eggs, and fish (8%), fruits and vegetables (2.3%), and nonalcoholic beverages, and beverage materials (2%). At restaurants and other out-of-home dining experiences, costs have reportedly risen 4.7%.

How consumers can combat inflation

Investing in stocks and exchange-traded funds (ETFs) is one way to try to combat the effects of inflation. While you’re not guaranteed a return on any investment, investing your money is a way to try and stay ahead of inflation—hopefully, your return will outpace the rate of inflation.

If the inflation rate is currently 2%, for a simple example, and your portfolio had a return of 5%, your real return would be 3%.

For comparison, the average annual return for the S&P 500 index over the past 10 years has been more than 13%. If you were to invest your money into a fund that tracks that index, your money would stay way ahead of the inflation rate.

Remember, however, that all investing involves risk. In order to protect yourself and your money against risk, it’s important to follow the Stash Way, by investing regularly in a diversified portfolio of stocks, bonds, and ETFs.

The post Explaining Inflation’s Effect on Your Wallet appeared first on Stash Learn.

Markets and the economy had a great year in 2019, with record gains for most of the major indexes, including the Dow, S&P 500, and the tech-heavy Nasdaq.

Now it’s on to a new decade, and to start the year out the right way, Stash is offering its perspective on some things to look out for in 2020 as you plan the most important parts of your financial life, which should include creating a budget, saving for emergencies and creating a financial plan for retirement. (Find out more here.)

Here’s wishing you a great new year, and a wonderful new decade!

Unemployment

At 3.5%, unemployment has reached a 50-year low. That number is also a far cry from the financial crisis of 2008 and 2009, when unemployment peaked at 10%.

In fact, in December the U.S. economy added 266,000 jobs, beating economist expectations by nearly 90,000 jobs.

Takeaway: No matter how you look at it, when U.S. consumers have jobs, it’s great for the economy. But higher employment rates means it’s more expensive to hire workers, which can drive wages up, as workers demand more, and can make it more expensive for businesses to take on new workers. As a result, businesses can pass along the cost increases to consumers, which can lead to inflation.

Consumer sentiment and spending

Consumer sentiment—which essentially means how people feel about their economic prospects and their willingness to spend—was strong toward the end of 2019. That’s according to something called the Consumer sentiment index, put out by the University of Michigan. Its most recent survey shows general confidence in the economy, for factors including employment, inflation, and the strength of household finances.

Consumer spending, which makes up nearly 70% of the economy, was particularly strong on the two mega-shopping days following Thanksgiving. Shoppers spent $7.4 billion online on Black Friday, a nearly 20% increase compared to their Black Friday spending in 2018, according to Adobe Analytics.  (They spent an additional $4 billion on Thanksgiving day itself, according to Reuters.) Even so, according to Adobe, it was Cyber Monday that emerged as the real winner for one-day sales, with online shoppers ringing up $9.4 billion in purchases, an almost 20% increase compared to 2018 when shoppers spent $7.9 billion.

Takeaway: Upbeat consumers who continue spending are generally a good sign for the economy. But consumer sentiment can change quickly. In fact, two-thirds of consumers still believe a recession will occur in 2020.

Interest rates

The Federal Reserve lowered interest rates three times in 2019, providing stimulus to the economy that may begin to fade this year.

Here’s how it works. Interest rates are the underpinning of consumer borrowing—think credit cards, car loans, and mortgages. Lower interest rates can provide a stimulus to the economy through cheaper loans.

But the Federal Reserve has indicated it’s finished lowering interest rates for now, and the current rates—the Fed lowered its benchmark rate to between 1.5% and 1.75% in September—may remain where they are for a while. In fact, in its most recent meeting in December, the central bank left interest rates unchanged.

Takeaway: Lower interest rates helped to stimulate the economy in 2019, but it’s unclear if the Fed will continue to lower rates in 2020.

The trade war

The U.S. is engaged in a trade war with at least half-a-dozen other countries, including China, Argentina, Canada, France, Japan, and South Korea.

But it’s the trade war with China that has most economic experts worried, as it has the potential to reduce economic growth.

Not only are the U.S. and China the largest economies in the world, but the two countries also trade nearly half a trillion dollars worth of goods with one another.

While the U.S. has entered into a partial agreement with China to resolve tensions, since 2018, the United States and China have taken turns raising tariffs on each other’s exports, including steel, soybeans, whiskey, lumber, and electronics, among others. In May 2019, the United States doubled tariffs on $250 billion of Chinese products and China responded by announcing tariffs on $60 billion of American products.

Takeaway: Trade wars can provoke uncertainty not just in the U.S. economy but globally. The tariff war with China has already led to higher costs at home. In fact, with the current tariffs in place, American households will spend an extra $2,031 per year, according to the National Foundation for American Policy.

Manufacturing slowdown

One worrying sign that’s been haunting the economy and economists since the summer of 2019 is the marked slowdown in manufacturing. In fact, November marked the fourth straight month that manufacturers reported a contraction in their activity, according to the Institute of Supply Chain Management, which tracks factory orders and output.

Takeaway: The trade war may be causing a drop in orders as American factories struggle to come to terms with global economic uncertainty. While manufacturing makes up only 11% of the U.S. economy, a slowdown in this sector could have a big impact on industries such as car manufacturing that make up a big chunk of economic activity, and on regions where manufacturing is an economic mainstay, according to reports.

Climate concerns

Climate change is real. Look no further than the increasing power of hurricanes, floods, and wildfires in recent years to permanently change landscapes.

And it’s likely that the increasing natural disasters will also harm the economy.

Here are some key findings from the most recent National Climate Assessment study, from 2018.

• By 2050, the average annual temperature of the U.S. could increase by 2.3 degrees.
• The U.S. economy could shrink as much as 10% by the end of the century, losing hundreds of billions of dollars in national and overseas trade, not to mention health costs and disaster relief. Farming and other agriculture will be harmed, through the declining health of livestock, reduced crop yields, and threats to food security, among other things.
• Aging national infrastructure could be further harmed by extreme weather such as flooding, heatwaves, and wildfires, leading to threats to the economy, national security, and human health.

Takeaway: Expect extreme weather events and other natural disasters to continue affecting the U.S. economy, potentially causing billions in damages and lost revenue.

Elections

2020 is an election year. And while individual presidents come armed with economic policies, achieving those goals can depend on politics. For example, a divided Congress lost in legislative gridlock could be good for business, because there is very little chance that meaningful regulations will be passed unless both parties find some sort of common ground. On the other hand, a unified Congress might have a good chance of passing things like infrastructure reform, health care improvements, or tax changes.

Takeaway: Elections matter, and politics can affect the economy in unexpected ways, from the passage of new regulations, to lowering interest rates, and spending on infrastructure.

How you can prepare

Volatility and risk, or the potential for your investments to lose money, are always part of investing, especially in the short term.

But there are things you can do to help shield yourself from too much risk.

We recommend following the Stash Way, which includes regular investing, investing for the long term, and diversification.

You can also consider adding safer investments such as bonds to your portfolio. They’re often good long-term investments that could help smooth out fluctuations in your returns.

Another thing to think about, particularly if you’ve got small amounts of money to invest, is to ride out any downturn by sticking to a regular investing schedule, and investing over time. You’ll effectively be purchasing investments sometimes when stocks are low, and sometimes when they’re high. Over time, share prices should even out.

The post Stash Looks Ahead in 2020 appeared first on Stash Learn.

One of the questions I get asked when the market goes down is, “Should I sell?”

My answer, which I’ve formed over the past 20 years, is not necessarily.

Selling is often the wrong thing to do. We encourage you to follow the Stash Way.

The U.S. has a strong economy, but occasionally interest rates rise, which the markets sometimes don’t like. Recently rising bond yields and tech stocks triggered a sell-off.

Think of an angry three-year-old child. He or she eventually gets over it. Markets do too. I have seen this movie play out time and time again. (I also have three kids!)

History shows us

Over the past 15 years, there have been turbulent periods in the market. Check out the graph below.

You’ll see gains and declines through the dot-com bust, 9/11, the Great Recession, wars in Iraq and Afghanistan, and four separate presidential administrations. You’ll see how staying the course is oftentimes the way to go.

The key to “investing” through market volatility, is to invest small amounts on a regular basis. Auto-Stash allows you to do just that. If you have it on, keep it on. If you’ve never tried it, now is the time. It’s an automated way to buy investments while they’re going up and when they’re going down. (This is known as dollar-cost averaging, and it’s really important.)

Long-term investors (that’s you) shouldn’t be concerned with timing the market. I’ve said this before and I’ll keep saying it—no one can predict exactly what will happen tomorrow or next week.

Stash is your investment adviser, and our goal is to look out for you and your interests by helping you continue to save and invest for your future. Although we can’t predict the future, try not to sweat the ups and downs.

It’s all about the time you are in the market that counts, not how you time it.

Brandon Krieg
CEO – Stash

The post Markets Go Down, Don’t Panic appeared first on Stash Learn.

U.S. inflation hit a six-year high in May, according to government data. The Consumer Price Index jumped 0.2% between April and May and is up 2.8% from a year ago.

While this is in line with Labor Department expectations, it’s one of the main reasons many Americans aren’t seeing much of an increase in their paychecks.

What does it all mean? In short, that everything is more expensive, and that your money is worth less than it was a short time ago. You aren’t necessarily getting paid less–but everything is getting more expensive.

Let us explain:

What’s inflation?

Inflation is the tendency of money to lose value over time. Or, in other words, it refers to the rising cost of goods and services over time. It’s a metric that measures the rising cost of living.

Listen up: Check out the “I Don’t Get It: What’s Inflation?” episode of Stash’s Teach Me How to Money podcast.

What’s the consumer price index?

The Consumer Price Index, or CPI, measures inflation. The Bureau of Labor Statistics releases monthly reports relating to prices, calculating the fluctuation in prices across different parts of the country and for different goods. From those calculations, inflation is expressed as the CPI.

How does inflation work?

There are numerous factors at play when it comes to inflation. But the main two are the ever evolving supply and demand mechanics related to the goods and services you buy, and consumer confidence, which is a measure of how consumers feel about the economy.

What you need to know, though, is that inflation slowly eats away at your money.

So, if you’re holding $1 in cash today and the inflation rate is 2%, it will be worth approximately $0.98 a year from now. That may not sound like much, but if you’re holding a lot of cash, inflation can leave a  significant dent.

Is there anything you can do to protect your money?

Analysts expect the inflation rate to drop a little by year’s end, but not by much.

As for guarding against inflation? Probably your best bet is to invest or deposit your money into something with a higher rate of return than the inflation rate. Most bank accounts won’t cut it–they will pay you interest, but even the highest rates are around 2%, which means you’re still a step behind inflation at its current rate.

By investing your money and leveraging compound interest, you can potentially shield it from inflation’s effects.

Fear of inflation? Stash has your back.

Learn more about investments that may help keep inflation from gobbling up your money on Stash.

The post How Inflation Could Be Eating Up Your Paycheck appeared first on Stash Learn.

On Wednesday, the Federal Reserve announced it will increase its benchmark interest rate to between 1.5% and 1.75%, and suggested rates would go up at least two more times in 2018.

This is the fourth time the Fed–which is the central bank of the U.S.–has raised interest rates since 2017, and it’s the sixth time since the financial crisis, which began in 2008. The move was widely expected, according to reports, and it further signals the confidence the central bank has in the economy

“The labor market has continued to strengthen and that economic activity has been rising at a moderate rate,” the Fed said in a statement on Wednesday. “Job gains have been strong in recent months, and the unemployment rate has stayed low.”

Newly appointed chairman of the Fed, Jerome Powell, announced the news in his first meeting with other central bankers. Powell was appointed in October to replace former chair Janet Yellen.

How does the Fed increase interest rates?

The central bank is increasing a rate called the federal funds rates, which is a short-term rate that it charges banks to borrow and lend money to one another. The federal funds rate forms the basis of other interest rates, such as for credit cards and mortgages.

The Fed has been slowly increasing the federal funds rate for the last two years as economic growth has gathered steam. In December, it raised this rate to between 1.25% and 1.5%. In June, it raised this rate to between 1.0 and 1.25%.

The increases follow a seven-year period when the central bank left interest rates at or below 0%, to stimulate the economy following the recession. Officials hoped lower rates would prompt consumer spending and bank lending, among other things.

Back, in 2015, Federal Reserve Chairwoman Janet Yellen made news when she announced the bank would increase the federal funds rate to a range between 0.25% and 0.5%.

The federal funds rate is sometimes referred to as the overnight rate, because banks conduct the lending and borrowing after daytime business hours.

Increasing interest rates and credit cards

A higher federal funds rate is likely to make it more expensive for consumers to borrow money for mortgages, charge on credits cards, and take out automobile or student loans, among other things.

And if you’re carrying a credit card balance, the increase in interest rates could be of particular concern. That’s because credit cards have something called a variable rate. A variable rate changes to reflect increases and decreases in interest rates. (That’s in contrast to a fixed interest rate, which as its name implies, stays the same no matter what.)

If you’re carrying a credit card balance, now might be the time to consider paying it off, or reducing it significantly if you can.

“Variable rate debt is where you are most susceptible as interest rates rise,” Bankrate analyst Greg McBride recently told CNBC.

Credit card debt is at a record high in the U.S., totalling more than $1 trillion in 2017.

Although most mortgage rates are fixed, some mortgages carry variable rates as well. These are called adjustable rate mortgages, or ARMs, and rates on these mortgages also rise when interest rates increase, making it more expensive for homeowners.

Higher interest rates aren’t always a bad thing, however: They can also lead to increased rates for bank savings accounts, for example.

“Job gains have been strong in recent months, and the unemployment rate has stayed low.”

What does the Federal Reserve do?

The Federal Reserve is the central bank of the U.S. It oversees 12 district banks, which together are responsible for the monetary policy of the U.S.

The Fed’s mission is to oversee the health of the nation’s financial system. It attempts to keep the economy strong and growing by enacting policies to maintain low inflation and healthy employment levels. It does this primarily by adjusting interest rates, and lending money to the nation’s banks.

The post Why Does the Fed Keep Hiking Interest Rates? appeared first on Stash Learn.

Commodities are the stuff of life. They’re also one of the building blocks of the economy, and they’re as old as time. They’re things like gold, steel, aluminum, oil and even food. Pork bellies and cattle, live and turned into beef. They’re also the unleaded gas in your car. The corn and sugar in your pantry.

All of these things are commodities. They’re all valuable, and that’s why people invest in them.

What are commodities?

Unlike some of the more esoteric elements of the economy, commodities are rooted in reality. They’re heavy, they fill up pallets, and sometimes they even smell and make noise. They’re more tangible than currency, and they’re certainly more earthy than that flashy new stuff called cryptocurrency. And they’re easier to understand.

Commodities are useful. People were trading in gold and wheat thousands of years ago. Why? Their value is undeniable. Gold is generally considered the safe haven for investment, because everyone has always recognized its value.

How are commodities traded?

Commodities are divided into several categories, including energy, metals, agriculture, meat and consumer goods. Energy includes oil and gasoline, both natural and unleaded. Metals include gold, silver, platinum and copper. Agriculture includes corn, soybeans and wheat. Meat includes hogs and live cattle. Consumer goods include cocoa, coffee, cotton and sugar.

Commodities are divided into several categories, including energy, metals, agriculture, meat and consumer goods.

In the U.S. the two largest commodity exchanges are in New York (of course, think Wall Street) and Chicago (which makes sense, considering the stockyards of “The Jungle,” by Upton Sinclair.) They are called the New York Mercantile Exchange, the NYMEX and the Chicago Mercantile Exchange, CME.

Why do people invest in commodities?

Here’s something else, to keep in mind: Commodities can act as hedge against inflation, according to some experts, since they tend to increase in value as inflation rises.

Inflation can have a negative impact on  other stocks. And as we wrote recently, fears about inflation have sparked some of the current market turmoil. So commodities can potentially work as a stabilizing position in a portfolio when other equities are particularly volatile.

How do people invest in commodities?

There are three primary ways to invest in commodities

You can buy the actual raw product. Cowboys still run cattle drives into Fort Worth, Texas and miners still extract gold from the depths of South Africa. But if you don’t feel like buying a ton of zinc on a pallet and trying to figure out how to unload it, there are other ways.

Some investors put their money in commodity futures. They may try to predict what will happen to the price of bacon a month or two down the road.

Others might invest in exchange-traded funds, also known as ETFs. They’re perhaps the most user-friendly tools for investors, since they act as baskets of commodities (such as pork bellies) which are traded as units on the market.

What are the risks?

Commodities can still be subject to volatility, caused by natural shortages, or even political uncertainty. President Trump and the U.S. Department of Commerce unveiled a blueprint recently that would impose a 24% tariff on all steel imports, and even steeper tariffs of 53% on steel imports from a dozen countries. This could spark fresh price swings in commodities markets.

Explain it to me: What’s a tariff?

Oil is also notoriously volatile, experiencing the worst spikes during its long history in 1979, when the unstable political situation in Iran disrupted the flow of petroleum, followed by an even worse spike in 1980 with the Iran-Iraq war. Oil prices spiked once again to their biggest peak ever in 2008, when hit $100 a barrel for the first time, due to a regional crisis.

Even something as simple as corn can be the plaything of the environment and politics. Remember when biofuels like ethanol were going to change the world? That was also in 2008, when corn prices spiked so dramatically from the ethanol boom that was blamed for driving up food prices in general.

Back in October, the CME Group in October started including the trading of bitcoin futures in its exchange. Is cryptocurrency the new commodity?

Not yet. The thing about commodities is that they’re rooted in the real world. And for investors looking to diversify, they can potentially have a place in your portfolio that can hedge against inflation and rising interest rates.

The post Jargon Hack: What are Commodities? appeared first on Stash Learn.

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Has your grandfather ever told you that back in his day, you could buy a whole shopping cart of groceries for $10? Or that a movie ticket used to cost a quarter?

He’s talking about inflation. In short, your money doesn’t buy as much as it used to. How does this happen? Well, that’s where it gets a little more complex. Luckily, we have Jeremy Quittner, Stash’s financial writer, to explain it all to us.

We tackle inflation, interest rates, and how it all affects the economy.

Thanks for listening to Teach Me How to Money. Send us your questions at teachmehowtomoney@stash.com, and we’ll try to answer the on a future episode. 

Ready to start investing? Sign up for Stash and then enter the promo code PODCAST and you’ll get $5 to get started on your financial journey.

The post Podcast: Learn About Inflation with Jeremy Quittner appeared first on Stash Learn.

Something called the Consumer Price-Index (CPI)–which gauges price increases for a host of items including cars, clothing, gas, even breakfast cereal–rose 0.5% in the month .

So what does the CPI have to do with you? We explain it.

What’s the CPI?

The Bureau of Labor Statistics (BLS), which is a division of the Department of Labor, compiles a monthly report about prices, called the Consumer Price Index, or CPI. While it looks at price changes throughout the country, it focuses primarily on changes in densely populated urban areas.

At its most basic level, the CPI measures inflation, which is an increase in the cost of goods and services. (Another measure the BLS uses is something called the Producer Price Index, which calculates the cost to industries to produce their goods and services.)

The CPI examines prices for a basket of goods including thousands of items in various geographies, including milk and coffee, rental and housing prices, televisions and toys.

Here are the categories:

• FOOD AND BEVERAGES: Breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks.
• HOUSING: Rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture.
• APPAREL: Men’s shirts and sweaters, women’s dresses, jewelry.
• TRANSPORTATION: New vehicles, airline fares, gasoline, motor vehicle insurance.
• MEDICAL CARE: Prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services.
• RECREATION: Televisions, toys, pets and pet products, sports equipment, admissions.
• EDUCATION AND COMMUNICATION: College tuition, postage, telephone services, computer software and accessories.
• OTHER GOODS AND SERVICES: Tobacco and smoking products, haircuts and other personal services, funeral expenses.

So what exactly happened?

The CPI increased in January for a broad category of goods and services. Some notable increases include energy, which jumped 3%; Clothing, which rose 1.7%; and medical care, which jumped 0.6%.

But some areas showed a decrease in prices, including natural gas services and electricity, which fell 2.6% and 0.2%, respectively, according to the BLS.

Why do people freak out about interest rates?

It’s complicated, but think of the economy as an interconnected ecosystem. When conditions change for one indicator, it’s like they’ll change for others. Last week, market indexes fell into correction territory, in part because of fear that inflation is on the rise.

Investors tend to worry about inflation, because it can mean that interest rates will also go up in response. Here’s why: Something called the Federal Reserve, which is the nation’s central bank, sets monetary policy–which includes how much money is flowing into the economy through the banking system. One way it controls the money supply is by adjusting a key underlying interest rate, called the federal funds rate, which affects the cost of borrowing money between banks.

Think of the economy as an interconnected ecosystem. When conditions change for one indicator, it’s like they’ll change for others.

That interest rate underlies many other interest rates that affect consumers, including mortgages, credit cards, and car loans. And the Fed raises it to decrease the money supply, and lowers it when it want to increase the money supply.

What impact does inflation have on the economy?

In 2008, as the financial crisis began in the U.S., the Fed lowered its interest rate to near zero percent. It did that to increase the flow of cash in the economy, and to spur borrowing and spending by consumers.

Over the past couple of years, however, as the economy has recovered, the Fed has raised its benchmark interest rate, aiming to get back to more normal levels, typically between 2% and 5%. The federal funds rate is currently between 1.25% and 1.5%.

But the Fed also bolsters interest rates when it fears the economy may be going into overdrive, and growing too quickly. One indicator that it looks at is inflation. And it has set as its goal for inflation at about 2%. If there are signs inflation will go much above that, the Fed is likely to raise interest rates to apply the breaks on the economy.

The Fed is likely to increase interest rates again in 2018, to get back to normal rates and to combat signs of inflation, experts say.

“The worry of the markets is not that inflation is becoming a big problem, … it is that the Fed is now forced to play catch up” by increasing interest rates, Peter Boockvar, chief investment officer at Bleakley Advisory Group, told CNBC on Wednesday.

How do higher interest rates affect the market?

Higher interest rates can increase the cost of borrowing for businesses, and that can eat into earnings for businesses, including public companies whose stock consumers may own. That in turn can cause stock prices to fall.

Higher interest rates can also increase the appeal of bonds, which pay a fixed percentage of interest to investors. As rates go up, the yield on many types of bonds also increases. The yield, or percentage of interest paid, on the 10-year U.S. Treasury–one of the benchmark bonds offered by the U.S. government–rose to 2.89% on Monday, according to Bloomberg.

That’s an increase of nearly 0.5% since the beginning of 2018.

Jargon hack! Seasonally adjusted vs. unadjusted prices

Now that you know the basics of the CPI, here’s something else to think about. The CPI also shows statistics for seasonally adjusted and unadjusted data.

Here’s what that means.

Different seasons can show spikes in economic activity. Think of all the things you do in the summer: you may go on vacation with your family or loved one, for example, and might visit a resort or some other travel hot spot, and spend some of your hard-earned cash.

And that amounts to increased economic activity in that region. But the summer ends, and the workers who staffed the boardwalk pizza stand or ride concession go back to school, and the stand closes for the season.

Similarly, the winter months can create a huge bump in oil consumption to heat houses and apartments. Or storms, like the recent hurricanes, can cause a temporary drop in economic activity. The seasonally adjusted data make allowances for those economic spikes and dips, and essentially smooth out the numbers.

While economists look at both figures, the seasonally adjusted numbers can give a better idea of economic trends, according to the BLS. (The 0.5% increase for January is seasonally adjusted.)

Economists also tend to focus on the core inflation number, which strips out energy and food–both considered to be volatile sectors of the economy. Core inflation rose 0.3% in January, which was the largest increase in a year, according to Reuters.

[infogram id=”697e2402-a543-4c4c-9f02-a9e1d15a9cf0″ prefix=”zCR” format=”interactive” title=”Consumer Price Index”]

12-month percentage change to CPI, as of January, 2018. Data is not seasonally adjusted.

Source: Bureau of Labor Statistics

So what does this all mean?

That 0.5% jump up in January may not seem like a lot. It’s just one month, after all. But it’s more than double the 0.2% increase recorded in December, 2017, according to the BLS.

For now, the DOL calculates the average annual rate of inflation to be about 2.1% for 12 months from January 2017 to January 2018.

We’re still a long way from runaway price increases, such as happened in the 1970s, when double digit inflation was common. But January’s increase has plenty of financial experts paying attention.

“Given the recent roller coaster ride in equities was sparked in good part by inflation fears accelerating rate hikes, the latest inflation data will be seen as increasingly important and telling, to date,” Lindsey M. Piegza, chief economist at Stifel Fixed Income, wrote in a research note, according to Reuters.

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You’re probably well aware of how supply-and-demand works when it comes to things like the price of oil, or consumer products like iPhones and Air Jordans. More demand tends to create higher prices, and vice versa.

The same is true for money:  The more dollars the Federal Reserve prints, the less each one is worth. Obviously, if there were only, say, a million dollars in the entire world, each one would be worth a lot more than if there were one billion.

This is what economists are talking about when they refer to inflation.

The dollar becomes inflated as its production begins diminishing its purchasing power. We see this every day in our experience as consumers. Twenty dollars doesn’t buy as many groceries as it did ten years ago.

Using the Consumer Price Index (CPI) inflation calculator, you can see that the U.S. dollar is worth about half what it was 30 years ago.

Aside from what inflation does to purchasing power, there are two other specific areas where you should understand inflation’s effects.

Retirement planning

Inflation can be especially hard on your retirement-planning efforts because there are limits to how much money you can contribute annually. The dollar’s purchasing power can drop significantly in 30 years.

That can affect retirement savings.

Treasury bonds

Treasury notes and other government bonds can provide investors one main advantage: consistent returns year-after-year. While these amounts can be humble, if you crave security, they’re something to consider.

Unfortunately, as you’ve probably been able to guess by now, this means they could actually pay out less as inflation goes up.

To make matters worse, as inflation goes up, investors sometimes rush to sell their bonds. They want to take their money and put it into something that won’t depreciate in value year-after-year.

The only way the Treasury can combat this is by offering higher yields to make them more attractive, but doing so increases the interest rates for most mortgages.

When that happens, there are a few noteworthy consequences:

• The value of investments goes down
• The federal government needs to spend more on financing its debt
• Interest on the national debt goes up

These added expenses to the national budget need to be offset either by cutting the country’s discretionary budget or increasing taxes. The only other option is even more deficit-spending, which slows economic growth.

None of these things are good for the consumer.

Try not to let inflation diminish your savings

As you can see, inflation is often not a good thing for your savings. While some inflation is necessary to spur the economy as a whole, the effect is always the same for the individual consumer: their money is worth less.

Inflation doesn’t have to hurt your savings, though. By investing your money, you essentially trade savings for other type of assets, like stocks, or real estate. These investments tend to be less affected by inflation than cash sitting in a savings account.

Looking to start investing instead of keeping cash savings? Stash helps you invest in the stock market with as little as $5. In fact, StashLearn is also giving new investors a special $5 sign-up credit to get started by just subscribing here.

The post How Can Inflation Affect You as a Consumer? appeared first on Stash Learn.

The Dow fell 666 points on Friday, which was its largest single-day decline since June, 2016, and the sixth-largest drop in the history of the index. Other indexes, including the S&P 500 and the Nasdaq followed, both dropping about 2% as well, according to reports.

It’s been a sudden turnaround for the stock market, which has risen to record highs over the last 12 months.

So what happened? We’ll explain:

Inflation, interest rates, and employment

Interest rates are rising

The Federal Reserve, the nation’s central bank responsible for setting monetary policy, has been increasing interest rates for the past few years. It did so in twice in 2017; And it’s expected to raise rates again in 2018.

Typically the Fed decreases rates when the economy is doing poorly, as a way to increase borrowing and spending, and it increases rates when the economy is doing well, as a way to apply the breaks when it’s afraid the economy may be overheating.

We’re on track for Gross Domestic Product (GDP) growth of about 5.4% in the first quarter, after years of growth closer to 3%. Too much GDP growth can spark fears of inflation, and with it the prospect of more rate increases.

Businesses, investors, and financial experts fear that both interest rates and inflation are on the rise, which can have a negative impact on the economy and the stock market.

Good to know: An interest rate is what’s charged on a loan, including mortgages, car loans, credit cards, and bonds. Inflation is an increase in the cost of goods and services that make up segments of the economy.

We’re approaching full employment.

It may seem strange, but Friday’s market drop occurred on the same day that the U.S. Department of Labor released positive news in its monthly jobs report. In January, employers added a healthy 200,000 new jobs, and the unemployment rate fell to 4.1%, its lowest rate in 17 years, according to reports.

While that’s great news for workers, The U.S. may be approaching what’s called full employment. In simplest terms, that means everyone who wants a job, or has been looking for one, has found one and is working.

Strong employment tends to push up wages–which have increased by about 2.9% in the past year, according to reports, which can spur consumer spending. And to cope with higher wages, businesses tend to raise their prices for the goods and services that consumers rely on every day, from gasoline for their cars, to toothbrushes and grocery items. All of this increases the risk of rising inflation.

Inflation has been running at levels of less than 2% annually, which is very modest.

But rising inflation can have a negative impact on markets.

Bonds are suddenly more attractive

Bonds, which are generally considered safer investments, are essentially IOUs from a company, city, or the federal government. As the Fed has steadily increased interest rates, the yields on bonds have gone up, too. For something called the 10-year Treasury, which is issued by the U.S. government, the yield has increased to 2.85%, which is half a percentage point higher than what it was a year ago.

Generally speaking, higher yields makes bond buying attractive for some investors, so more money is leaving the stock market for the bond market.

Higher bond rates also increase costs for businesses

Businesses, in particular large public companies, issue bonds to raise money to fund operations. Increasing interest rates can make it more expensive for them to borrow money.

Rising inflation can have a negative impact on markets.

Think of it like your credit card–when the interest rate goes up, it becomes more expensive to charge the things you want or need.

Higher borrowing costs can depress stock prices for public companies.

Is a market drop a bad thing?

Not necessarily.

The current bull market is one of the longest on record. Numerous financial experts and analysts have said the run up in stock prices, and stock indexes–before today, the S&P 500 was up nearly 18% for the year*–can’t be sustained.

And the sell-off could be a sign of things returning to normal, according to some experts.

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