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Inflation and the Consumer

  • Writer: Andrew Walters
    Andrew Walters
  • May 4, 2025
  • 5 min read

The Federal Reserve defines inflation as, “The rate at which the price of goods and services increases over time.” At its most basic understanding, inflation is caused by greater growth in the money supply relative to the availability of goods and services in an economy. T prices of everything we buy - from houses and cars to food and drinks - are significantly more expensive than they used to be. Pictured below is a graph from the St. Louis Fed that showcases the substantial growth in US housing prices over the past 60 years. Currently, the median home sale price is $419,200 as opposed to a mere $17,800 in 1963. Throughout this article we will

examine two primary types of inflation (consumer and asset) and evaluate their impact on US citizens and their saving, spending, and investing activities.


Consumer inflation refers to rising prices of consumer goods and services. This reduces purchasing power and diminishes the value of each dollar. According to the FDIC, the average rate on savings accounts is 0.41%, while many larger national banks pay rates as low as 0.01%. On the flipside, consumer inflation rates currently sit at 2.81% and historically fluctuate between 2% to 5 % on average. Let’s walk through an example. If you were to deposit $100 into a classic savings account, you would expect to have a balance of $100.41 after a year.

But that money will not have the purchasing power it previously did. Assuming inflation of 2.81%, it would now require you approximately $102.81 to purchase the same amount of goods or services that you previously could’ve for $100. The difference between adjusted purchasing power and the value of deposit after one year shows the amount lost through inflation. The graphic shown below illustrates the diminishing purchasing power of the dollar over time. This can be largely attributed to the consistent expansion of the money supply at a higher rate than the growth of goods and services in the US economy. As more dollars enter the system, the value of each existing dollar diminishes. This phenomenon hurts those holding cash the most and disproportionately affects the lower class who own less assets. Saving money is necessary to an extent for all individuals, but it is important to be aware of the opportunity costs incurred by saving. When the rate received on deposits is less than that of consumer inflation, the value savings will erode.


Many Americans experience firsthand the financial burden of prices rising. A report done by Trading Economics found the average price of eggs in early 2015 to be $1.10 per dozen. A dozen eggs today cost about $3.15. The Personal Consumption Expenditure (PCE) and the Consumer Price Index (CPI) are the two main indexes used to measure price growth in the United States. These two indexes measure a slightly different basket of goods and services. The PCE is more flexible and changes the distribution of its basket with economic trends. The CPI’s basket is fixed, and critics say it’s out of touch with ever-changing markets. The CPI focuses more on consumers spending, whereas the PCE tracks inflation from the seller’s perspective. The CPI is the more traditional index and is used by the government to adjust social security payments and rates on Treasury Inflation Protected Securities (TIPS). The Federal Reserve, on the other hand, prefers the PCE as a benchmark for their target annual inflation level of 2%. Traditionally the CPI returns higher inflation than the PCE. Neither one of these indexes perfectly represents the overall growth of prices across the whole economy but they provide a benchmark to go off.


Now we will shift our focus towards asset inflation which holds a greater impact on investing. Asset inflation refers to price growth in assets including - but not limited to - stocks, bonds, and real estate in relation to their real economic growth. Asset inflation is much trickier to measure than consumer inflation and can result in asset bubbles. The most notable asset bubbles in US history include the stock market leading up to the great crash of 1929, the dot-com bubble that burst in 2000, and the housing market that crumbled in 2008. These resulted from a variety of economic implications, but all represent what happens when asset prices are bid up far beyond true value. The primary causes of asset prices increasing are economic appreciation, low-interest rates, and fear of inflation. When interest rates are lower, the cost of borrowing money is cheaper, giving a greater incentive to take on debt. Lower mortgage rates can lead to housing prices being inflated as buyers become increasingly able to afford mortgages on expensive properties. Fear of inflation also encourages investment in interest-bearing assets as opposed to saving money.


Investments in stocks, bonds, and real estate can enable your wealth to outpace inflation. You must first understand your personal risk tolerance and timeline for liquidation. Diversifying investments across uncorrelated assets reduces risk while broadening exposure to markets. Since 1957, the S&P 500 index has returned an average of 10.13% each year. A 10-year US treasury note currently yields 4.29% annually. The real estate market has historically appreciated at modest rates of 2% but provides an opportunity to amplify returns through leverage while also developing operating income. A good rule of thumb is to never invest in anything you don’t understand. By utilizing public information, you can make educated investments and position your portfolio to succeed over time.


Inflation impacts saving, spending, and investment practices of citizens across the US. In this article we explored how savings lose value during inflationary conditions, how greater growth in money supply relative to availability of goods and services causes price increases, and how interest-bearing assets can be utilized to grow wealth. We can use our understanding of consumer and asset inflation to make educated financial decisions that best position us to thrive in an economy where inflation has been normalized and is likely here to stay.



References:


Federal Deposit Insurance Corporation. (2024). How inflation impacts savings. https://www.fdic.gov/resources/consumers/consumer-news/2022-12.html


Federal Reserve Bank of St. Louis. (n.d.). Personal consumption expenditures (PCE). FRED. https://fred.stlouisfed.org/series/PCE


Federal Reserve Bank of St. Louis. (n.d.). Median sales price of houses sold for the United States (MSPUS). FRED. https://fred.stlouisfed.org/series/MSPUS


Federal Reserve Bank of St. Louis. (n.d.). Visualizing the purchasing power of the U.S. dollar over time. FRED Blog. https://fredblog.stlouisfed.org


Federal Reserve Board. (n.d.). Inflation (PCE). https://www.federalreserve.gov/faqs/economy_14419.htm


NerdWallet. (2025). Average bank interest rates for savings accounts, CDs, and more. https://www.nerdwallet.com/article/banking/average-bank-interest-rates


Trading Economics. (2025). Eggs – United States: Price. https://tradingeconomics.com/united-states/eggs-price



U.S. Bureau of Economic Analysis. (n.d.). Personal consumption expenditures (PCE): What it is and how it’s measured. https://www.bea.gov/data/consumer-spending/main


U.S. Department of the Treasury. (n.d.). Resource center. https://home.treasury.gov


YCharts. (2025). S&P 500 average annual returns. https://ycharts.com/indicators/sp_500_return


Environmental Trading Edge. (2023). Consumer inflation vs. asset inflation: How the Federal Reserve is changing the game. https://environmentaltradingedge.com


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