Watch Intro Series

Inflation: What Is It, and What Can You Do About It?

Inflation is a word that’s been in headlines a lot recently, but what is it and what does all this talk of inflation mean for you

Simply put, inflation is a general rise in prices, or a decrease in the purchasing power of money. Inflation takes into account price changes for a diversified set of products and services over a period of time and is most commonly measured using the Consumer Price Index (CPI). It’s a normal part of our economic system and is generally around 2% per year.

The most recent information available from the U.S. Bureau of Labor Statistics reports that the CPI has increased 8.5% over the last 12 months (as of March 2022), which is the largest 12-month increase since the period ending December 1981. Over the last 12 months, costs of:

• Food at home rose 10%
• Full service meals rose 8%
• Gasoline rose 48%
• Housing costs (shelter) rose 5%

In dollars, this means $100 in your checking account from March 2021 has only $92.13 of buying power today. I won’t depress you by quoting the buying power of $100 from 2012 and 2002, but if you’re curious like I was, you can check out the CPI Inflation Calculator.

Inflation is influenced by many things. It can be caused by demand, production costs, or fiscal policy. The graphic below provides a great summary.

Melissa Ling {Copyright} Investopedia, 2019

Recent inflation can be explained in-part by supply chain issues, lockdowns (and “revenge spending” after 12+ months of being stuck at home), and repeated government stimulus checks throughout the coronavirus pandemic.

Whether inflation is good or bad depends on your circumstances. One relatable example for many is home values. As a homeowner, it is great to see the equity in your home grow due to an increase in its price if you were to sell. Not to mention, owning your home protects you against rent increases during times of high inflation. On the other hand, if you’re looking to buy a home right now, it doesn’t feel so good to see home prices higher by more than double-digit percentages over last year, depending on your market. The increase in home prices may mean you need to lower your standards to afford a home within your budget. Another possibility is postponing your home purchase until you save a larger down payment to help a new mortgage fit into your budget.

 

Inflation affects us all in one way or another, and it can be easy to feel discouraged and overwhelmed—to wonder what it means for you. I encourage you to put the things you can’t control (i.e. the rate of inflation) out of your mind as much as you can and instead focus on the things you can control.

So if money saved today is worth less tomorrow, what should you do?

Evaluate your spending. With a larger chunk of your income going to necessities, identify areas where you can cut back if needed.
Take a fresh look at your emergency fund. Higher prices mean your basic cost of living has increased. Make sure your emergency fund is still sufficient to cover 3-6 months of your expenses. If your emergency fund is too low, prioritize increasing that fund to the extent that you’re able.
Don’t hold on to too much cash. Most banks pay little to no interest on cash in savings accounts. While it’s important to maintain your emergency fund, the value of cash beyond what you need for emergency or short-term expenses will erode over time. Avoid the temptation to keep more than what’s truly necessary.
Keep investing. Over the long-term, the stock market outpaces inflation and investing in a globally diversified portfolio provides the best potential for returns that exceed inflation. Investing is critical for your success in meeting your long-term and retirement goals.
Review your insurance. Whether homeowners or renters insurance, review your policy to check for under coverage. Your insurance agent can help you make sure your coverage limits account for the rising cost of construction materials and property replacement.
• Increase your income. If appropriate, ask for a raise or promotion, or connect with a recruiter to learn about opportunities you’re well suited for that come with a pay increase and, possibly, a sign-on bonus. If switching jobs isn’t ideal, consider ways you might be able to make money outside of your job, like starting a side-hustle or finally decluttering your belongings and selling things you no longer need, use, or enjoy.
Meet with your financial advisor or financial accountability partner. Talking through your concerns with your advisor or a trusted friend can help you get some of your fears off your chest as you both come up with actionable steps to ease what’s weighing on you.

I hope this week’s article is helpful for you! I would love to hear your thoughts in the comments! If there are any other topics you’re interested in reading about, please share those too!

On a personal note, I will be publishing an article every other week moving forward. I’m happy to report that my habit of reading and writing regularly has grown stronger over these last couple of months, and as work and life get busier, cutting back to publishing every other week will allow me to maintain a realistic balance.

Until next time!