Cynthia Measom

Sun, May 25, 2025, 8:01 AM7 min read

Inflation — it’s a word you hear frequently, but do you really understand what it means?

The main effects of inflation are better interest rates for savings accounts and higher costs of living, but there are several more nuanced effects to watch out for as you manage your money.

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Increasing your understanding of the different types of inflation and how they could impact your life both positively and negatively can help you make better financial decisions, especially when it comes to protecting your money now and in the long run.

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 to downright sinking.

When there are rumors of recession or rising inflation rates, your purchasing power can feel like it has hit a roadblock. Here are a few key takeaways for inflation in 2025:

• Inflation affects the prices of everything around you and is affected by a lot of factors such as supply chain issues, a housing crisis, tariffs, consumer demand and more. 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.

• Many economists expect inflation in 2025 to rise 2.5%, up from 2.3%.

• Volatile food and energy costs are estimated to reach 2.7%, up from 2.5%.

• Inflation increased 0.2% in the 12 months ending April 2025, putting the current inflation rate at 2.3%, and the core inflation rate closer to 2.8%.

• 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.

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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.

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.