How Cooling Inflation Impacts Your Retirement

As an investor, retirement saver, shareholder, or even an LLC member, keeping an eye on the ebb and flow of economic indicators is crucial. Inflation is a major indicator that’s been on everyone’s mind over the past year. After the pandemic, the massive supply chain issues, and the resulting sharp rise in inflation in 2022, the rate finally shows signs of cooling down closer to where we were in March 2021. And that’s going to impact our investments and retirement plans.

Remember, the impact of economic changes like cooling inflation can vary greatly depending on your individual circumstances, the specific investments held within your retirement accounts, and your retirement timeline. Always consult with a financial advisor to understand how these changes may impact your specific situation.

With that said, what does cooling inflation mean for your retirement plans and other investments?

What Does It Mean When Inflation Slows Down?

The inflation rate is derived from the Consumer Price Index for All Urban Consumers (CPI-U, or CPI), a tool used to monitor changes in the price level of consumer goods and services.

In simple terms: when these prices go up, inflation is on the rise; when these prices go down, so does inflation.

Inflation slowing is often perceived as good news for consumers because it means the prices of goods and services are not increasing as rapidly as they were. However, for investors, the story can be more complicated, especially when it comes to how the central bank, or the Federal Reserve, responds.

Understanding the Consumer Price Index

The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. It’s designed to measure changes in the price level of a set (or “basket”) of goods and services typically purchased by households. 

The annual percentage change in a CPI is used as a measure of inflation. In essence, the CPI is a gauge of the cost of living and a barometer for economic policy decisions. They also provide a measure of “core inflation,” which excludes items like volatile food and energy prices. Because these prices could be impacted by weather and other volatile, unpredictable events, they might not be a true reflection of inflation’s impact on consumers.

Federal Reserve’s Role in the Economy

The Federal Reserve, or “the Fed,” is the central banking system of the United States. It’s responsible for implementing monetary policy, regulating banks, and ensuring the financial system’s stability. One of the Fed’s main tasks is controlling inflation while attempting to keep unemployment low.

To curb inflation, the Fed can use a variety of tools. Their most common method is adjusting the federal funds rate. This move can slow economic growth and, in turn, inflation by making borrowing more expensive.

Federal Reserve officials often respond to inflation by rate hiking or raising interest rates. By doing this, they aim to slow down the economy and prevent it from overheating. In 2022, when inflation was high, the Fed began raising the interest rates and did so for ten straight months. 

However, in 2023, with inflation slowing down, these rate hikes are becoming less frequent and could stop altogether.

What This Means for Your Retirement Plan

When it comes to your retirement plan, the type of retirement account you have will largely dictate the impact a slowing inflation could have on it. For instance, those with a defined contribution plan may experience short-term fluctuations in their investment returns due to economic changes.

Here’s a look at how some common retirement plans might be affected:

401(k)s and IRAs

Defined contribution plans (such as a 401k) are often invested in a mix of stocks, bonds, and cash equivalents. With inflation slowing and the potential for lower interest rates, bond investments may offer lower yields. However, equities could potentially benefit from increased consumer spending as prices stabilize. 

Stocks: As inflation slows, companies previously pressured by rising costs may increase their profitability, potentially leading to rising stock prices.

Bonds: When interest rates fall, existing bonds with higher interest rates can become more valuable, possibly leading to capital gains for bond investors. However, the yield on new bonds would be lower. Keep in mind that bonds are fairly nuanced and intricate investments, so please consult with your financial advisor to determine how your bonds are impacted by inflation.

Cash Equivalents: Lower interest rates could mean lower returns on assets like money market funds. However, cash equivalents are considered low-risk investments. So, typically, they aren’t heavily impacted by inflation and interest rates.


As a defined benefit plan, pensions promise a set monthly benefit at retirement. The actual payout is not directly influenced by inflation or interest rates, but these factors could impact the health of the pension recipient’s overall financial situation. For instance, pensions don’t typically receive cost of living adjustments (COLAs). So, as inflation rises, the buying power of a pensioner’s defined benefit goes down. As inflation cools, they regain some of that lost buying power.

Savings Accounts

Traditional savings accounts might actually benefit from cooling inflation. Savings accounts don’t typically offer great interest rates. In fact, they usually fall far below the inflation rate. The big difference here is that inflation can erode the value of the U.S. Dollar. So, while cooling inflation won’t offer significant growth in your savings account’s interest rate, it could help improve the value of the dollars saved within your account.

High yield savings accounts offer higher interest rates than traditional savings accounts. Unfortunately, those rates could also fall in a lower inflation environment. In some cases, the interest rates for HYSAs actually outpaced inflation. But this is situational and wasn’t true for all savers. For most, the impact of slower inflation would be similar to traditional savings accounts—the savings in these accounts would maintain their purchasing power better as inflation slows.

Social Security

For Social Security, the impact could be more direct. Social Security benefits are adjusted annually based on the CPI. With last year’s rising inflation, Social Security recipients received one of America’s biggest COLAs of all time. This year, with inflation slowing, this could mean a smaller COLA next year.

Planning Ahead

Despite the potential challenges, there are ways to safeguard your investments and retirement plans from these economic shifts. Diversification is key. It’s crucial to have a balanced portfolio that can weather different economic scenarios, including periods of high or low inflation. 

Moreover, investors need to keep in mind that the economy is cyclical. Inflation goes up; inflation comes down. These are just events in the cycle. Long-term investments are going to lose value periodically. Just keep an eye on your long-term investments to ensure they’re earning more over time. You can always move your money to safer investments during economic downturns to help minimize risk and loss.