Inflation is a word you hear all the time. However, many people don’t fully understand how it works or how it impacts their daily lives.
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While some effects of inflation, such as the ever-increasing cost of living, are obvious, others are more subtle, like possibly getting better interest rates for savings accounts. Understanding the different types of inflation, how they influence your purchasing power and what you can do to protect your money can help you make smarter financial decisions today and in the future.
How Inflation Affects Your Money
A simple definition of inflation is that it’s the increase in the cost of goods and services over time in an economy, which is usually expressed as a yearly percentage. As of November 2025, the inflation rate has increased from 2.3% at the beginning of 2025 to 3.0%, whereas core inflation is 3.1%. Inflation rates are measured by price indexes, including the Consumer Price Index (CPI) by the Bureau of Labor Statistics and the Personal Consumption Expenditures (PCE) price index from the Bureau of Economic Analysis.
Not all outcomes of inflation are bad. In fact, maintaining a healthy rate of inflation is good for the economy. Here are some of the positive and negative effects of inflation.
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Positive: You’ll Get Better Savings Account Rates
Investors with short-term goals might invest in a high-interest savings account if they think they will need access to their funds shortly. If this sounds like you, your short-term savings could get a boost because increasing inflation often prompts the Federal Reserve to raise interest rates, and banks, in turn, often raise the rates they pay on savings deposits. So, you could benefit from a better return on money sitting in your cash or savings account.
Negative: Borrowing Becomes More Expensive
But those aren’t the only rates banks raise. When the Federal Reserve raises interest rates, it makes it more expensive for banks to borrow money from one another. These increased rates are then passed on to individual and business borrowers. Because of this, higher inflation means higher interest rates on the money you borrow — and less money in your pocket.
Positive: You Might Receive a Pay Raise or Find a Higher-Paying Job
As inflation pushes the price of goods and services higher, it can also be positively correlated with higher wages. Not only do companies find they need to offer better salaries to new hires, but they’ll also have to pay more attention to fairly compensating their existing employees to retain the talent they already have. This means if you’ve been looking around for a new job as inflation is rising, you could get paid more at a new company, but you might also have an increased opportunity for a raise.
Negative: Your Mortgage Payment Could Increase
Borrowers who have an adjustable-rate mortgage might find that an uncomfortable effect of inflation is a higher interest rate when their mortgage is “adjusted.” Adjustable-rate mortgages have a “teaser” rate in effect for a set amount of time, such as five years, as seen with a 5/1 ARM. After five years, however, the rate “adjusts” every year. If inflation causes interest rates to rise during an adjustment period, the interest on your mortgage loan will increase, and so will your monthly payments.
Positive: You Might Receive a Cost-of-Living Adjustment
Even if you don’t have the money to invest in stocks, gold or other assets that might be positively impacted by rising inflation, a little inflation could still benefit your financial situation. Recipients of Social Security and Supplemental Security Income could see an increase in their monthly payments when the Consumer Price Index, one of the inflation measures, goes up. This is called a cost-of-living adjustment (COLA), and it means you’ll have a few more dollars to cover your monthly budget.
Negative: You’ll Pay More for Stuff
With inflation, prices of pretty much everything start to rise. Medical care and prices for prescription drugs could increase, and your rent could also go up. And unless your paycheck goes up at least as much as the inflation rate, you’ll be trying to pay for the increased costs of items on the same income, so inflation can be tough on the wallet — especially during hyperinflation.
Hyperinflation occurs when very high rates of inflation spiral out of control. Also, keep an eye out for the phrase “core inflation,” which is an inflation measurement that excludes certain volatile markets like energy and food. On the other hand, if you see the term “all-items Consumer Price Index,” note that it’s a measure of economy-wide inflation.
Negative: Your Long-Term Savings Might Erode
For investors who count long-term, conservative investments as a significant part of their net assets, inflation can be a dirty word. This is because these traditionally safe investments, like bonds, often require investors to lock into a guaranteed rate for a long time. Inflation creates a situation where these long-term investments that pay a low interest rate have decreased buying power because inflation pushes up the price of goods and services.
Clearing Up Inflation Confusion
If inflation right now is relatively low compared to a few years ago, why does the cost of living still feel so high? Well, as inflation is simply the rate at which the price of goods and services increases, the last few years have left a lot of people financially treading water, while others are downright sinking. And when there are rumors of recession or rising inflation rates, your purchasing power can feel like it has hit a roadblock.
How To Protect Your Money From Inflation
The best way to combat inflation is to invest in a balanced portfolio that includes some portion of long-term capital investments, like equity stocks. Ideally, these equities will increase in value over time and above the inflation rate.
Though investing in more conservative investments such as bonds might be a safer way to go, some experts disagree because, in times of higher inflation, the low rate of safer investments could be below the inflation rate, which means your future buying power is slowly getting eaten away.
Instead, consider protecting your money from inflation by investing in the following:
- Treasury Inflation-Protected Securities: TIPS are bonds, but they are backed by the government and their return is linked to inflation through the CPI.
- Blue chip stocks: These offer dividends and capital appreciation over the long term.
Think about how an increase or decrease in inflation could impact your life — including your grocery bill, short-term savings and retirement savings, as well as your earnings and vacation plans. Understanding how inflation works can help you make wiser financial choices, so you can make the best decisions for your family.
Caitlyn Moorhead contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: How Inflation Actually Affects Your Money
