Interest Rates & Inflation

Explain "inflation" in plain English

Inflation is when prices broadly rise across the American economy. Over time, prices of all goods and products go up. For a simple example, a bottle of Coca-Cola used to cost 5 cents in 1940's. Today, coke bottles cost over $1. Over time, inflation causes the price of a bottle of Coke to rise.

Explain what "interest rates" are

Interests rates are what lenders (an example of a lender is a bank) will charge someone to borrow money. Let's say you wanted to borrow $100,000. The lender would charge you an 8% "interest rate" to let you borrow the money.  So if the lender charged you an "8% annual interest rate," you would owe $8,000 on your $100,000 loan that year.

Won't rising inflation eat into my retirement savings?

Inflation is a big reason why it's important to be invested in a broadly diversified portfolio. By investing your money - rather than letting it sit idle in a checking account or under a mattress - you're better prepared for inflation.

If you own stocks, the value of those stocks can adjust over time. If you have money sitting in a bank account earning little to no interest, it wil lose value because of rising inflation. Short-term "shocks" of unexpected inflation spikes can cause companies trouble, but over time companies will adjust the prices of their products to adjust for inflation.   

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