Costs Are Rising: How to Handle the Current Inflation Rate

Costs Are Rising: How to Handle the Current Inflation Rate

12/06/2021 | Savings & Budgeting

Is Inflation Making It Harder to Meet Your Monthly Budget?

If so, you’re not alone. The current inflation rate is top of mind for many Americans as they are feeling the squeeze almost everywhere they shop. 

Prices are going up and the value of money over time is going down. According to the Consumer Price Index, which is the most watched measure of the U.S. inflation rate, prices increased 6.2% in October. That’s the largest increase since November 1990. Significant price increases contributing to the overall inflation rate include:

  • Used car and truck prices are up 26.4%; new vehicles, up 9.8%.
  • Gasoline prices are up 49.6% over the last year; the last time they were this high was September 2014. 
  • Fuel oil prices have increased 59.1%.

While significantly higher than the average inflation rate, October’s numbers aren’t a sign of destabilizing hyperinflation that destroys living standards and wipes out financial systems. However, they are a big concern for consumers.

Understanding Inflation

Inflation is the term used when prices for a wide range of products or goods go up over a specific length of time, reducing your purchasing power. Despite how that sounds, it’s not necessarily bad for the economy.

In fact, some inflation can be a sign of a healthy, growing economy. When people have more money to spend, demand for products goes up, prices go up and, in turn, salaries go up. 

The Federal Reserve, whose job it is to keep inflation under control, aims to keep the average inflation rate around 2% by managing the supply of money in the economy. 

Why Is the Inflation Rate Rising So Fast? 

Although inflation can be a very complicated subject, the cause of inflation right now is easy to pinpoint. It’s the pandemic.

When the pandemic first hit, the economy paused. Factories shut down, people stopped traveling, entertainment venues and restaurants closed, and millions of people lost their jobs. 

With low demand, the prices of goods dropped considerably. 

Then 2021 got underway and demand started to pick up. The $1.9 trillion stimulus bill was passed, vaccines became available, people started shopping and traveling again, and prices increased. 

This is one reason inflation looks to be so high right now. 2021 prices are much higher than 2020 prices even though they may not be much higher than pre-pandemic prices.

But there’s more to it than a one-year blip in demand. Supply chain issues are another part of the equation. As factories open up, they can’t just throw a switch and start producing goods at the same level as before the pandemic. It will take time for them to catch up to pre-pandemic production levels and, until that happens, prices will continue to rise.

On top of that, the labor-force participation rate has dropped 1.7 percentage points since the pandemic began. Businesses are having a tough time finding enough people to meet production demands. 

What Today’s High Inflation Rate Means to You 

Many economists predict the current inflation rate will continue to rise well into 2022. The White House and the Federal Reserve have both addressed our current inflationary spike as a “transitory” byproduct of the pandemic. Just what they mean by “transitory” remains to be seen. 

According to Federal Reserve Chair Jerome Powell, “…what transitory has meant is that if something is transitory, it will not leave behind it permanently or very persistently higher inflation.”

The good news is that this transitory inflation is expected to end. The question is how long it will take to fix our supply chain issues. With a limited labor force, getting our supply of goods moving at pre-pandemic levels may not be as easy as some think. 

Many economists expect that the Federal Reserve will try to slow the pace of inflation by tightening monetary policy through higher interest rates and cutting back on emergency stimulus.

Tips for Handling Inflation

When inflation goes up, your cost of living goes up and your purchasing power goes down. So what can you do to protect your hard-earned money? 

  • If you don’t have much in savings, start by looking at your budget and cut back on spending if possible. Our savings and budget calculators are a simple way to get started.
  • Look for ways to increase your income. Consider getting a part-time gig to supplement your finances or find a job that pays more. With a strong jobs market, employers are likely to be offering higher salaries to fill demand.
  • Make the most of your savings. If you have a purchase or home repair that needs to be made, don’t put it off. With prices predicted to continue to rise, you won’t have the same purchasing power if you wait. 
  • Refinance your mortgage and other loans while interest rates are still low. Contact us today.
  • If you have more than six months' salary in savings, look for accounts or investments that offer a greater rate of return than the rate of inflation.

Consider strategies to help diversify your investment portfolio.1 Managing your money effectively starts with careful planning leading up to and throughout market changes. Talk to a United Bank Financial Advisor today. When it comes to your financial health, we’re here to help.

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