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Mon, Jul 18, 2022 3:27 PM

Effects of inflation on investments

What is inflation?

Inflation is a rise in the average cost of goods and services over time. It’s measured by the Bureau of Labor Statistics, which compiles data to determine the Consumer Price Index (CPI). The CPI tracks the cost of goods such as gasoline, food, clothing and automobiles over time to gauge the overall rise in the price of consumer goods and services.

In 2021, the cost of living as measured by the CPI rose 7%.1 That means overall prices increased by 7% for the year. In theory, this means a car that cost $20,000 in 2020 would cost $21,400 in 2021.

Supply and demand play an important role in inflation. Prices tend to rise when demand for a good or service rises or supply for that same good or service falls. Many factors affect supply and demand nationally and internationally, including costs of goods and labor, taxes on income and goods, and availability of loans.

“We’re currently seeing issues in the supply chain of many goods as a result of pandemic-related economic shutdowns,” says Rob Haworth, investment strategy director at U.S. Bank. “This has led to imbalances and higher price levels. For example, the supply of new cars has dropped significantly over the past year due to a shortage of microchips. In turn, we’re seeing demand for used cars go up. These factors have pushed prices higher for both new and used cars.”


Read a more detailed analysis from U.S. Bank investment strategists on the current economic environment’s impact on inflation.

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