Inflation 102: History and financial planning impact of inflation

Inflation in the U.S. used to be much more volatile than it is today. At one point in 1778, during the fledgling days of our nation, the annual inflation rate reached as high as 29.78%.1 Double-digit spikes occurred four times before the Federal Reserve was created in 1913, which was tasked with monitoring and attempting to moderate the country’s inflation rate.

1913 is also the year the Consumer Price Index was created, making it easier to track consumer price inflation trends. After World War I, the inflation rate spiked to 20.9% in June of 1920 until a recession occurred later in the early 1920’s. The Great Depression at the end of the decade was marked by deflation. Inflation returned with the start of World War II, although volatility petered out in the postwar era.

In the 1970’s, the Fed’s loose monetary policy meant to reverse high unemployment rates also caused major inflation, which ultimately reached 14% by 1980.2 Interest rates also skyrocketed during this period, reaching as high as 20%.

Today, the Federal Reserve targets an average 2% annual inflation rate with the goal of creating price stability alongside maximum employment. In July 2022, the annual inflation rate measured by the CPI was 8.5%.3

How the inflation rate impacts your financial planning

Inflation and investing go hand in hand. The performance of your investments over time influences how much purchasing power you’ll have when it comes time to withdraw those funds in the future. Creating a diversified portfolio to take advantage of growth while mitigating risk is a delicate balance, which is why it’s a good idea to work with an experienced financial advisor.

Here’s how two different types of assets hold up against inflation.

Cash savings

Having liquid assets in a cash savings account is certainly a good idea for short-term financial needs. But holding all of your wealth in cash can have a diminishing effect over the long term.

For example, if inflation rises a steady 2% per year and the return on your cash is less than that, your savings lose value over time. Keep in mind that your returns must exceed the rate of inflation even after all your taxes are paid in order to truly keep pace with inflation and protect your purchasing power.


Stocks represent a greater risk than cash in terms of volatility, but they can be a useful tool to fight against inflation, particularly in the long-term. The after-tax returns available from stocks have a better track record of outpacing inflation over time. Your advisor can help shift your portfolio based on inflation and other economic factors.

The bottom line

A moderate inflation rate is normal and even healthy for a growing economy. And while it’s important to monitor inflation on your own, your financial advisor is another trusted resource to track this rate and ensure your portfolio is well positioned for a high inflation environment.


Dowling & Yahnke is a fee‐only registered investment adviser. Since 1991, Dowling & Yahnke has provided time-tested, objective financial planning advice and investment management services designed for the financial health and personal freedom of its clients. Located in San Diego, California, the Firm manages approximately $5.7 billion for more than 1,300 clients, primarily individuals, families, and nonprofit organizations.

Our team consists of highly-educated, experienced, and ethical professionals devoted to the highest standards of client service. We design custom wealth management solutions delivered with the highest level of personalized service.


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