As you may have noticed when buying anything lately, America is experiencing significant inflation – the highest in 40 years, according to economists. What really is inflation? How did we get to this point? What’s being done about it? And most importantly, what can you do to reduce the effect of inflation on your personal budget?
Inflation is the rate of increase in prices over a given period of time. For 28 years, from 1992 to 2020
, the U.S. inflation rate never exceeded 4.0% annually; in fact, inflation was greater than 3.0% just six times during this time. That changed in 2021, when the U.S. inflation rate hit 4.70%, then went up even more in 2022, at an annual rate of 7.7%
(as of October 2022).
Unfortunately, inflation can rapidly erode your purchasing power. For example, a one pound loaf of white bread that cost $0.86 in 1997 now costs $1.81 as of October 2022
, a 110% increase, due to the purchase power-sapping effect of inflation.
How did we get historically higher inflation in 2021 and 2022? Most economists attribute the root causes of our current high inflation to the classic reason of “too many dollars chasing too few goods.” As America emerged from the COVID-19 pandemic, a rapid increase in household demand for many items, coupled with supply chain shortages and shipping delays, rapidly pushed prices up. Anyone who’s made a major purchase during this time, such as of a new or used car, new furniture or a vacation, has experienced this reality firsthand.
Since inflation took off, the Federal Reserve has been trying to “pump the brakes” on inflation by rapidly increasing interest rates. The Federal Funds Rate, the interest rate that banks and other depository institutions lend money to each other, has been increased five times in 2022, by three percentage points, to try to reduce America’s high inflation rate.
While it’s good to know what the Federal Reserve is doing to try to tame inflation, you still need to cope with higher-priced gas, food, clothing and other items. What can you do to handle inflation?
- Reduce your expenses – Common items that could be cut or reduced in cost include print and electronic subscriptions, cell phone and internet service and home and automobile insurance. See if you can find better pricing on all of these expenses. Our partnership with Mylo is a great place to start when reviewing all of your insurance options.
- Invest in yourself – If you’re feeling stuck in a lower-paying job and have interest and aptitude in a better-paying career, take classes to earn a degree or certification that qualifies you for a new job. Prospective employers think highly of those who have worked hard to advance their skills and knowledge.
- Continue saving and investing – Don’t let high inflation deter you from your long-term financial goals, like setting money aside for an emergency or to fund a future major expense, like college or retirement. Advancial offers several different savings options to fit your specific needs. Take a look and see which options would be most beneficial to you.