Inflation is the rate at which the price of goods and services is subject to increase. It is a measure of how fast money loses value or how purchasing power fluctuates within an economy. To determine inflation rates, economists consider the average price increase of a group of specific goods and services in a year. When an economy experiences high inflation, the price of goods and services is experiencing a surge. Although moderate levels of inflation might be symbolic of economic growth, unpredictable and high levels of inflation can adversely affect incomes, savings and investments, and financial planning.

First, high inflation is known to result in higher interest rates. When an economy is experiencing inflation, it means there is a lot of money chasing fewer goods. To correct this anomaly, the government usually increases interest rates to control spending and mop up excess cash that is in circulation. This means that fewer people will be inclined to borrow, reducing consumer spending and easing inflationary pressures. However, when the inflation rate is low, central banks usually reduce the interest rates to ensure that there is more money in circulation.

Also, inflation causes an erosion in purchasing power. With inflation, every unit of currency loses its value and can only buy fewer goods as overall commodity prices rise. When this happens, it becomes a little harder for businesses and individuals to pay bills, invest in assets, or save money for the future.

Further, inflation usually affects the real rate of return on investments. The real rate of return is an investment return that has been adjusted for inflation. After the return on investment has been adjusted for inflation, the actual profits accruing from the investment are usually impacted by inflation rates.

Consequently, financial managers often advise that people adopt investment options with returns that can match inflationary levels. It is best to invest in securities such as TIPS (Treasury Inflation-Protected Securities). Similarly, investment assets like real estate, government bonds, and equities are instrumental in hedging inflation. Real estate investment can protect from inflation because the value of a property and the rent that tenants pay often experience a parallel growth rate with inflation. Also, the value of government bonds usually grows as inflation increases, meaning one does not suffer significant losses as a result of inflation. Further, investing in a company's share with a robust market capitalization during inflation would mean that investment value is intact and is not corroded by the effects of high inflation.

Inflation also has significant effects on retirement planning. Because high inflation usually comes with a rising cost of living and increased healthcare costs, one should adjust for inflation when evaluating retirement expenses. Failure to do this might result in an inability to execute financial plans.

Debt management is another aspect of financial planning that is affected by inflation. When a person has a debt obligation with interest rates that are not fixed, they are likely to pay more than they projected when inflation rates go high. This happens because central banks usually increase interest rates during inflation to reduce the amount of money in circulation. Consequently, one of the best ways to ensure debt is hedged against inflation is to refinance it to fixed-income debts.