Inflation Rises in the U.S. What Does That Mean for Your Dollars?

• Author: Jacob Greene
• Posted: 2024-04-25

Inflation has been on the rise in the U.S. economy since the economic downturn due to the pandemic that hit last year, and it continues this year. The government injected large amounts of money into the economy to bolster it and create relief in the form of business bailout packages, loans, and individual household stimulus checks.

The government recently signed off on another stimulus package in the amount of U.S. 1.9Trillion dollars. This will cause a further inflation wave in the economy. The economy and the markets have to consume this introduction of money to balance inflation and prevent a recession.

Your Dollar Buys Fewer Goods and Services
The rapid influx of money into the economy has elevated the inflation rate, which has trickled into consumer goods and services' rising costs. The money people acquire they spend causing demand for goods and services to climb, along with prices. The U.S. dollar is devalued as it affords much less than it previously did. You buy fewer goods because you pay more money for less goods and services. Thus, causing you the consumer, to adjust your overall lifestyle.

The Safest Type of Investment
The U.S. Financial Instruments or Treasury Securities are considered the most protected type of investment in any economy. Investors will always receive a return on this type of investment because the government guarantees the money. The government has the ability to produce money to pay coupons or interest rates to investors. The printing of money and putting it into the economy will further increase inflation rates. However, investors will still generate returns on their investments.

The U.S. Treasury Department sells financial securities called Treasury Bills to remove money from the economy and reduce the inflation rate. Treasuries are the Federal government's debt. The government offers four types of debt security: Treasury Bills, Treasury Notes, Treasury Bonds, and Savings Bonds, all traded on the secondary markets excluding Savings Bonds.

The U.S. government sells 2-10-years Treasury bonds. The government pays a 10-year yield or interest rate on the 10-year Treasury bonds. Investors observe these interest rates because the U.S. government secures them. The 10-year yield rate is also used to gauge more widespread investor confidence in the market. The 10-year Treasury bond interest rate also reflects mortgage interest rates and business and other consumer loan interest rates.

Interest Rates
Economists and financial watchers keep a close eye on the rate of inflation. They monitor the 10-year yield rate and the inflation rate. The 10-year yield rate recently jumped from 1.64% to 1.75%. Economists also observe whether inflation will reach its proposed rate of 2% or exceed its 2.30% market expectation rate over the next 10 years.

If inflation surpasses the market expected rate of 2.30%, interest rates can climb even higher. This means you, the consumers, and the businesses will be paying more for adjustable mortgage rates and business and consumer goods and services.

Rising Inflation and the Stock Market
Investing in the markets or buying stocks during inflation can lead to investor uncertainty. Inflation devalues your dollar's buying power, so you will have to use more dollars to acquire the number of stocks you want to purchase.

Inflated markets are often riskier investments, as some stocks are more volatile than others. This causes some investors to lose confidence in the market. They avoid investing in volatile markets, while other investors take advantage of the open investment opportunities when the market is speculative.

Market speculation involves trading a financial instrument that carries a high risk for possible high returns. The investor takes advantage of the market changes when price movements of securities are volatile. These speculative investors take on excess risk and provide market liquidity when other investors refrain from participating in stock market activities.

The market continues to be volatile, with up and down stock prices and returns due to inflation and the ensuing pandemic. Some investors suffered losses while others have profited. The interest yield rate is recently higher, which can increase your dollars. But the volatility of an inflated stock market in times of an economic downturn means that your dollars may drastically decrease.

Nevertheless, if the economic activity is sustained and financial conditions continue to promote economic growth, the inflation rate will taper. This will cause interest rates to decline, and goods and services will become more affordable. Investors can expect the financial markets to become less volatile, and you will have more money available to maintain your lifestyle.