Have You Accounted for Inflation?

Remember when you were a child and you’d hear your parents or grandparents say something like, “When I was a kid, a cup of coffee only cost a nickel...”?

Well, that cup of coffee costs a lot more now (and it’s not only because of the fancy new offerings at the gourmet coffee houses of the world). This price increase can be attributed to something called inflation, or in other words, rising prices over time.

But of course, coffee isn’t the only thing consumers have paid more for over time. The Consumer Price Index (CPI) tracks prices for a basket of more than 80,000 goods and services. From 1914 until 2020, the average price for those goods and services has risen by about 3% a year.1

How Inflation Affects Your Investment Goals

Over time, inflation reduces the value of a dollar. At a 3% inflation rate, a cup of coffee that costs $5 today will cost about $9 in 20 years.2 That’s nearly twice what you’d pay today.

As you plan for your future investment goals, you might consider taking into account inflation, as well as your risk tolerance and investment timeline. If you don’t invest your cash in a diversified portfolio of investments that at least match or beat the inflation rate, you can fall further and further behind over time.

Although past performance is no guarantee of future results, a portfolio that held a mix of US stocks and government bonds tended to exceed the rate of inflation from 1926–2017.3 Generally speaking, portfolios with higher allocations to stocks than bonds have been more likely to exceed inflation over time, but with a higher degree of risk—especially in the short run.

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