In 2021, you could buy a bag of oranges for $4.70. Now, the cost of those same oranges, on a good day, is around $5.50. In my experience, oftentimes more. That is a 14% increase. In 2021, you could buy 2 lbs of ground beef for $10.21. Now, the price you see at the store is around $12 or more. These differences might not seem like much, but those slight increases on every item in your cart can add up to big differences. That, my friends, is one of the most powerful results of inflation on the average family. In this course, I will explain what inflation is, how it affects our families’ personal finances, and what we can do to ease the impact.
I. What is Inflation?
According to the Federal Reserve, inflation is “the increase in the prices of goods and services over time.” This definition is purposely oversimplified. There isn’t a certain product or service that is monitored to determine inflation. Instead, policymakers watch price indexes. A price index is the measure of price differences in a group of goods or services. For instance, personal consumption expenditures (PCE). This index is monitored closely because it relates highly to household expenditures. PCE inflation also includes services for consumers that are paid for by others on behalf of consumers, such as employers. The most well-known indicator of inflation, though, is the Consumer Price Index (CPI), which measures the percentage change in the price of goods and services consumed by households. CPI inflation measures the cost consumers pay directly. CPI normally receives more attention as it is released earlier than the PCE numbers. Obviously, there are more to these numbers but I will not get too granular for purposes of this article’s length.
The current U.S. inflation rate is 7.7% for the 12-month period leading up to October 2022, according to the latest release from the Bureau of Labor Statistics. Inflation rose 0.4% in October from September. The inflation rate for November will be released Tuesday, December 13th. I will update followers on my Instagram when the figure is released.
If you would like to know more, below I have listed what Federal Reserve policymakers monitor:
“First, because inflation numbers can vary erratically from month to month, policymakers generally consider average inflation over longer periods of time, ranging from a few months to a year or longer.
Second, policymakers routinely examine the subcategories that make up a broad price index to help determine if a rise in inflation can be attributed to price changes that are likely to be temporary or unique events. Since the Fed’s policy works with a lag, it must make policy based on its best forecast of inflation. Therefore, the Fed must try to determine if an inflation development is likely to persist or not.
Finally, policymakers examine a variety of “core” inflation measures to help identify inflation trends. The most common type of core inflation measures excludes items that tend to go up and down in price dramatically or often, like food and energy items. For those items, a large price change in one period does not necessarily tend to be followed by another large change in the same direction in the following period. Although food and energy make up an important part of the budget for most households–and policymakers ultimately seek to stabilize overall consumer prices–core inflation measures that leave out items with volatile prices can be useful in assessing inflation trends.”
There are a number of factors that cause inflation. The initial surge in inflation was driven, in part, by supply chain issues, production costs, and the sharp increase in consumer spending upon receiving economic stimulus from the pandemic. Monetary policies, and politics, also play a major part. The effects of inflation are widespread and dig deep into the economy. Supply chain issues persist and energy prices have seen recent hits due to the conflict in Ukraine. Therefore, experts believe inflation will remain elevated for a couple of years.
So, I bet you are wondering how inflation affects you. Let’s discuss that now.
II. How inflation affects our families.
Millions of Americans are facing financial hardship due to the increasing inflation rates. As a matter of fact, according to a Gallup study conducted in August 2022, a whopping 56%, now say price increases are causing financial hardship for their household. Exactly how is inflation affecting our families?
A. Purchasing Power. High and unstable rates can cause extreme economic difficulties as it erodes the purchasing power of household finances and makes it difficult for people to plan how much they can spend, save or invest. Essentially, households can buy less for the same amount of money. According to Moody’s Analytics senior economist Ryan Sweet, the average American is now spending $460 extra a month compared to a year ago. As cost of living increases and wages remain stagnant, American families struggle to make ends meet. Families are being forced to draw down savings and building credit card debt.
B. Interest rates. In order to curb inflation, the Federal Reserve raises interest rates in order to lower the overall level of demand, hopefully reducing the upward pressure on prices. So far, the Federal Reserve has increased rates four times this year. The high interest rates make it more expensive for people to borrow money and encourage us to save, which means we typically spend less on goods and services.
C. Impact on savings. I mentioned earlier that the average American may see a decrease in their savings balances as they must withdraw in order to meet their consumer needs, but there is another effect of inflation on your savings. Even if your savings balance doesn’t decrease, the value will be less. If the inflation rate exceeds the interest earned on a savings or checking account, then the investor is losing money. Essentially, it isn’t worth as much as it was before. You have lost buying power.
III. How to ease the impact.
Policymakers are taking steps to address inflation but the truth is, we may see inflation linger for a while longer. Therefore, you should also take steps to protect your hard-earned money. There are a few ways to do this.
A. Invest savings in longer-term investments. One way to beat inflation is to invest your savings for a better return than you can get in money market accounts or savings accounts. An example, Treasury Inflation-Protected Securities (TIPS). TIPS are Treasury securities issued by the U.S. government. They are indexed to inflation in order to protect investors from a decline in the purchasing power of their money. “As inflation rises, rather than their yield increasing, TIPS instead adjust in price (principal amount) in order to maintain their real value.” They are issued in terms of five, 10, or 30 years. Your principal balance of this investment is protected. You will never receive less than what you originally invested. If you are interested in purchasing TIPs you can visit http://www.treasurydirect.gov
However, before making a decision, make sure to study the pros and cons. While we have discussed a couple of pros, one con of TIPs is a lower yield. Further, the inflation adjustment is considered taxable income. Be sure to discuss this option with your tax accountant.
B. Stock Investments. Returns on stock investments generally tend to beat inflation. Investors who want to avoid the volatility associated with individual stocks might opt for mutual funds, however.
C. Budgeting adjustments. This is a great time to revisit your budget and consider eliminating unnecessary expenses. Below is a list of ideas to consider:
-Reassess monthly subscriptions like tv, gym, clothing, or music.
-Reconsider vacations. Travel somewhere closer to home or shop around for better travel deals.
-Delay home renovations until material prices lower.
-Consider commuting to work.
-Keep a grocery list so you don’t overbuy.
Inflation has tightened its grip on the average American family. Even the wealthiest have begun to feel the impact. I hope this article provided enough information to help you make informed financial decisions for your family. ! It is essential you remain apprised of the ongoing inflation situation. I will continue to update you on the situation through my articles and Instagram @onmoneywithlaurabaize.