An inflation rate of 7% in 2021 has prices up and consumers worried across the country—but what does it mean for you?
Inflation decreases the purchasing power of money, meaning that $20 in your wallet won’t stretch as far tomorrow as it does today. That may sound scary, but economists agree that inflation is a normal and necessary part of the economy. If you’re not an economist, though, you’re probably less concerned about the long-term functioning of the economy and more concerned with being able to afford groceries, rent, and car payments next month.
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car insurance, is here to break down the inflation equation. We’ll go over the basics of this economic phenomenon and look at its state today. Then we’ll take a look at five specific ways inflation could impact you, and some hacks to make your money stretch further to weather the economic storm.
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What is inflation—and do you need to worry about it?
Inflation is an economic term that refers to a decrease in the purchasing power of currency. As the buying power of the money in your wallet goes down, prices go up. Those rising prices are the thing that most average people associate with the phenomenon of inflation.
The Consumer Price Index (CPI), calculated by the
US Bureau of Labor Statistics, tracks changes in the average price of a “basket” of goods and services that consumers need.
What’s in that basket? Food, gasoline, electricity and other utilities, shelter, transportation, medical care, and cars, both new and used. By showing the changes in the price of these essentials over time, the CPI gives a quantitative indicator of how inflation impacts consumers.
Inflation is a normal part of the economy. In fact, an inflation rate of about 2% a year is an expected part of life, and not cause for concern. But sometimes that rate picks up—and that’s when people get nervous.
What’s going on with inflation?
You’ve probably noticed rising prices at the grocery store, at Starbucks, and—maybe most of all—at the gas pump. That’s because inflation is on the rise following the height of the COVID-19 pandemic.
How fast is inflation rising? The Bureau of Labor Statistics reported a 7.5% increase in the Consumer Price Index for All Urban Consumers (CPI-U) for the 12-month period ending in January 2022. For context, that’s the biggest increase since 1982.
There’s no single reason for the spike in inflation, but experts agree that the following factors have probably contributed:
- Low pandemic interest rates
- Pent-up consumer demand
- Government stimulus spending
- Supply chain shortages
- Built up consumer savings
In other words, people who limited spending and saved up funds during the pandemic are heading to the stores now—and demand is wildly outpacing supply. Inflation is the economy’s response, but economists don’t expect it to be this way forever. Like everything, inflation has its moment—and as stressful as it might be to live in it—the storm is temporary.
Five ways inflation might affect you personally
Rising prices are the most obvious effect of inflation, but there are other ways this change might impact your life. We’ll take a closer look at five of inflation’s unexpected effects—and you might be surprised to find that not all of them are bad news!
#1. Your paycheck won’t go as far.
Okay, let’s start with the cold hard facts. Inflation does mean that your paycheck isn’t going to stretch as far as it used to. The price of food at home (i.e. groceries) went up by 8.6% in the past year, meaning your grocery budget might be due for a revision.
Meat is one of the groceries most affected by inflation, with a 14% inflation rate in the past year, so going vegetarian or experimenting with meatless Mondays is looking better than ever!
Other major price increases? Gasoline nearly tops the list, with a 38% inflation rate. Finding ways to drive less, like carpooling or biking to work, can help you save money at the pump. Or, if you’re already in the market for a new car,
consider going electric.
#2. It might be time to invest.
Starting an investment portfolio during a moment of economic uncertainty might seem counterintuitive, but if you’ve got extra savings on top of what you’d need for emergencies, this could be the perfect time.
Why? Low interest rates on savings make the cash in your bank account worth less than ever during inflation. Investments, on the other hand, have greater long-term potential. If you’ve got more than an emergency cushion of three to six months’ expenses, moving that cash into a stock-heavy portfolio could be a smart financial move.
#3. If you’ve got a fixed-rate mortgage, inflation could be good news.
Inflation isn’t a bummer for everyone. If you’ve got a fixed-rate mortgage, you’ll keep the same interest payment, meaning that the interest you’re paying to your lender is worth less than it was before. In other words, you’re saving money thanks to the variations in the market!
Variable-rate mortgages and other loans fare worse during inflation, due to rising interest rates. If that’s your situation, you’ll need to keep a close eye on your budget to make sure you’re able to keep up with payments.
#4. If you’re in the market for a used car, you’ll pay more than you would a year ago.
The average price of used cars went up by 41.2% between February 2021 and February 2022—more than any other item measured by the CPI. If you buy a used vehicle today, you’ll be paying significantly more than you would have just twelve months ago.
With inflation affecting used car prices so heavily, it might be worth looking into
buying newinstead. Affordable options like the Chevrolet Spark ($15,695), Nissan Versa ($16,205), and Kia Rio ($17,275) could put a new car within your budget—and you might end up saving on maintenance costs.
#5. Your wages could go up—but it’s a good time to start a side gig.
In general, employers make cost-of-living adjustments to wages in order to account for the effects of inflation. Depending on your situation, you could see your pay going up with inflation—but the reality is different for many workers.
With inflation moving so fast, most raises won’t keep up with inflation. In fact, the
Bureau of Labor Statisticsfound that while average wages rose by 4.7% in 2021, the average worker effectively got a 2.4% pay cut.
If that’s your position, smart budgeting might not be enough to keep up with the impacts of inflation. Finding a side hustle, joining a union, or searching for a new full-time job are just a few ways to ensure that you can keep meeting your needs in spite of inflation.
Is inflation bad?
A big question that comes up whenever inflation’s in the air is: is inflation bad?
Like most questions that won’t die, this one doesn’t have simple answers. Economists agree that inflation is a normal part of a healthy economy, but that doesn’t mean it can’t get out of hand—or that it won’t have negative impacts on ordinary people.
Hyperinflation, or inflation that happens at an unusually high rate, is a serious problem. You might be familiar with images of Germany’s Weimar Republic, when paper marks were worth more as wallpaper and cooking fuel than as currency. During the hyperinflation of Peru’s Lost Decade in the 1980s, cafes changed their prices multiple times a day!
But to count as hyperinflation, inflation rates generally need to measure at least 50% each month—and the United States has never entered that treacherous territory. So, until you see your neighbors starting to paper their walls with Benjamins, it’s not time to panic yet.
That said, ordinary inflation can still pose serious problems for regular people, especially when wages don’t keep pace. If you’ve got plenty of savings or a high-paying job, you should be able to weather the storm, but if you’re among the thousands of Americans working on a tighter budget, inflation is an undeniably bad thing in the short term.
How to make your money stretch further during inflation
With all that doom and gloom, you might be feeling pretty discouraged. Don’t be. Remember, inflation is a temporary reality, and with some smart money hacks, you can keep your expenses low. Here are a few simple ways to adapt to rising prices:
- Shop smart. Inflation affects meat and seafood more than fruits and vegetables, so cutting back on your animal proteins and exploring the wonderful world of vegetarian eating could be an easy way to spend less at the store. Buying in bulk can also ease the strain on your wallet!
- Drive less. Unless you live in one of the US’s few cities with robust public transportation, never buying gas probably isn’t an option. But carpooling, biking to work, or opting for public transit could help you limit your fuel consumption—and free up space in your budget.
- Budget, budget, budget. If you already use a budget, sit down and evaluate whether it’s still serving you. If you haven’t jumped on the budgeting train, it’s time to take stock of your expenses and start planning your spending.
- Buy used—or look for free alternatives. Clothing prices and home goods are affected by inflation, so head to the consignment store for savings. Check out your local Facebook groups for opportunities to buy, sell, and barter!
- Revisit your car insurance policy. Car insurance is a major expense for any car owner, and inflation may cause providers to hike your rate. Don’t let yourself get trapped in an overpriced policy—download theJerryapp to locate the most affordable rates for your vehicle.
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