“If the current annual inflation rate is less than 3 percent, why do my bills seem like they’re 10 percent higher than last year?”1
Many of us ask ourselves that question, and it illustrates the importance of understanding how inflation is reported and how it can affect investments.
What Is Inflation?
Inflation is defined as an upward movement in the average level of prices. Each month, the Bureau of Labor Statistics releases a report called the Consumer Price Index (CPI) to track these fluctuations. It was developed from detailed expenditure information provided by families and individuals on purchases made in the following categories: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services.2
How Applicable Is the CPI?
While it is the most commonly used indicator of inflation, the CPI has come under scrutiny. For example, the CPI rose 2.4 percent for the 12 months ending in September 2024. However, a closer look at the report shows movement in prices on a more detailed level. Transportation services prices, for instance, rose 8.5 percent during that same period. The CPI represents a “basket of goods,” and your personal basket of goods may not reflect the basket represented by the CPI.1
Are Investments Affected by Inflation?
Yes, they are. As inflation rises and falls, three notable effects can be observed.
First, inflation reduces the real rate of return on investments. For example, if an investment earned 6 percent over a 12-month period and inflation averaged 1.5 percent during that time, the investment’s real rate of return would have been 4.5 percent. When taxes are considered, the real rate of return may be reduced even further.3
Second, inflation puts purchasing power at risk. As prices rise, a fixed amount of money is able to purchase fewer goods and services over time.
Third, inflation can influence the actions of the Federal Reserve. If the Fed seeks to control inflation, it has various tools for reducing the amount of money in circulation. Hypothetically, a smaller money supply could lead to reduced spending, which may result in lower prices and slower inflation.
Empower Yourself with a Trusted Professional
When inflation is low, it can be easy to overlook how rising prices affect a household budget. Conversely, when inflation is high, it may be tempting to make sweeping changes in response to increasing prices. A balanced approach may be to work with a financial professional to develop an investment strategy that accounts for both scenarios.
At SHJ Wealth Advisors, we have been implementing an approach to CPI for over 30 years to help ensure all relevant variables are considered for investments and planning. Please reach out to Info@shjwealthadvisors.com if you would like to find a time to meet with one of our CFP® Professionals and thanks for reading!
- USInflationCalculator.com, 2025. As of August 2025.
- BLS.gov, 2025
- This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Past performance does not guarantee future results.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.
