Inflation has made its impact in the past couple of months. If you've noticed an increased cost of goods and services, that's due to inflation. While inflation is natural and normal, it has increased drastically in the past months.
Inflation increases the cost of goods and services within a given period. For example, between 1922 and 2020, the U.S. dollar had an average inflation rate of 2.83% per year. While that doesn't seem like much, it has created a cumulative price increase of roughly 1,440%. That means the dollar is now worth 15 times less than in 1922.
It's best to remember that inflation is natural despite the staggering statistics. Despite the decrease in the power of the dollar, there has been an increase in wages.
Americans are currently dealing with much higher inflation rates. The main issue is that while the price of goods and services has increased, there has not been an equal wage increase to counter it.
Understanding Inflation
The Bureau of Labor Statistics (BLS) is a government agency that collects data to create the Consumer Price Index (CPI). CPI follows the prices of consumer goods and services, like gas, transportation, food and beverages, apparel, and more. Tracking pricing allows the CPI to show any increases in prices over time.
For example, according to BLS, from January 2021 to January 2022, the Consumer Price Index rose 7.5 percent. Food prices rose by 7 percent, while energy prices rose by 27 percent. Therefore, a gallon of milk or a car in 2021 would be 7% more expensive than the previous year.
Many factors contribute to inflation— one being supply and demand. When the supply for goods and services is low, or demand for them is high, prices for those items are likely to rise. The U.S. has been dealing with supply chain issues throughout the pandemic, which has put a crimp on available supply, increasing prices for related goods and services.
In addition to the supply chain, energy prices (especially oil), regionalization, and the Federal Reserve interest rates affect inflation.
- Energy prices and oil: Increasing energy and oil costs usually leads to higher costs for the transportation of goods, which increases the cost of goods and services.
- Regionalization: Regionalization is when goods and services are provided locally rather than overseas. Typically, we have access to cheaper goods produced overseas where wages and costs are lower. When production moves back to the U.S., the prices increase due to increased production costs.
- The Federal Reserve Interest Rates: When the Federal Reserve makes any changes in monetary policy, it'll ultimately impact inflation. Interest rates are a vital factor when affecting inflation. Low-interest rates incentivize people and businesses to borrow more, thus increasing supply and demand. On the other hand, high-interest rates disincentivize borrowing, decreasing inflation. Currently, the Federal Reserve is raising rates to combat inflation, which might slow the economy and bring inflation down.
What Does Inflation Impact?
Inflation impacts almost everything. No goods or services are left untouched from increasing prices when the dollar inflates. Inflation affects the following costs:
- Groceries
- Gasoline
- Utilities
- Clothing
- Cars
- Housing costs and rent
- Loans
- Stock prices
Dealing With Inflation
Inflation will undoubtedly strain your finances— your budget will likely increase while your income remains stagnant. Here are some steps you can take to fight inflation:
- Negotiate. Most people think their bills have fixed prices, but you might be surprised at what negotiating can get you. First, see if you qualify for discounts or special programs. Next, ask your billing companies for a lower rate— you might be surprised at how successful you are.
- Wait out the big purchases. The cost of goods and services will likely decrease once inflation returns to normal. Therefore, it might be best to wait on purchasing any big-ticket items. For example, chip shortages have significantly affected the cost of cars, so it might be best to hold off on buying one soon.
- Update your budget. As your expenses increase, it might be best to update your budget. Typically, this would entail accommodating the price increases by moving things around and rethinking your spending habits. Prioritize debt and necessities, then move down the list to see if you can remove anything to save money.
- Rethink your investments. If you don't see any investment returns due to inflation, you should consider diversifying your portfolio. Some assets will do better during high inflation compared to others. For example, suppose most of your investments are with the Treasury. In that case, you might consider Treasury inflation-protected securities, equities, and commodities.
Takeaway
Inflation has affected many Americans who haven't seen an increase in their income. So now, Americans struggle to save money, pay off debts, get loans, save for retirement, or meet their financial goals. Thankfully, high inflation does not last forever. There are some simple steps that anyone can do to save extra money during this time.