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What Inflation Is and Why It Matters

Inflation is the increase in prices for services and goods. While it doesn’t sound like a good thing, it’s not always bad. Some inflation is healthy; on average, increases around 2 percent annually are expected. The more dangerous type of inflation or deflation (when the prices for goods and services decline) for the economy is when prices climb or fall quickly.

Fluctuating prices can lead to a domino effect across the economy that negatively impacts businesses and consumers. For example, inflation can lead to less purchasing power. That essentially means the value of your money shrinks when inflation grows.

As a result, you may have trouble buying the same products you did before since they’ll be more costly. Your wages and savings can also take a hit since they experience devaluation during inflation. Generally, this leads to increases in the cost of living.


To defend against the adverse effects of inflation, consider these strategies:

  • Build your emergency fund, which should equal at least three to six months of expenses.
  • Invest in equities on the stock market while prices are low.
  • Revisit any debts you owe, and compare interest rates to the value of your money.

In need of money solutions? AAA can help you manage, borrow and save. Visit us at AAA.com/MONEY for more information.