Inflation
The Four Letter Word That Uses Nine Letters
It’s no secret that inflation has been a major issue, if not the major issue, in the economy for the past few years. The U.S. experienced, on average, inflation below 2% from 2010 through 2020. Therefore, relatively small increases in household income kept up with cost of living during that time. Several factors have caused high inflation for the past three years, to include: the savings rate for Americans increased during COVID, several government stimulus programs poured money into the economy, there was a pent-up demand for goods and services, the U.S. experienced our lowest unemployment in over fifty years, and nominal wage growth was a byproduct of low unemployment. During 2021 and 2022, people had excess money to spend, and demand overwhelmed supply. Even though the U.S. savings rate has declined in 2023, consumers have maintained high levels of spending via credit cards.
The rate of inflation has been below 4% for the past several months but it isn’t close to the 2% goal of the Federal Reserve Board. The primary purpose for the Federal Reserve Board is to control inflation and their primary tool is the manipulation of interest rates. By making money more expensive to acquire, less businesses and individuals will apply for and receive loans. Less money in the economy in general will lower demand for goods and services. The data for the past several months reflects that wage growth has started to consistently outpace inflation, although people in rural areas, low-income earners, and people on fixed incomes may still be feeling inflation’s nasty bite.
The big issue is not knowing that we have inflation, but how do we manage our finances in its wake. None of us have any individual control over the prices bread, eggs, or milk. However, we must focus on what we can control, such as reducing on own expenses. From thrift stores to libraries to estate sales, there are a wide variety of money saving strategies. For example, are we shopping for groceries based upon the cost or based upon the environment of the shopping experience? Shopping at Whole Foods might feel like a more satisfying experience that shopping at Aldi’s, but that comfort might have a huge impact on your checkbook. Other things to think about – how to minimize use of high energy appliances, using less gas by batching errands, and taking advantage of higher interest rates with a High Yield Savings Account. Additionally, studies have consistently shown that consumers spend less when making cash transactions versus using a debit card. That old fashioned paper money might be your budget’s best friend.
The opposite coin of the spending equation is the amount of money coming into your household. Workers or business owners should reflect regularly on their own value. Questions to ask: What have I done for professional development? What is the next logical step in my career? How do I transition to a higher paying position? If you aren’t making the sacrifices necessary to grow your business or to take advantage of professional opportunities, then inflation will continue to have an oversized impact on your life.
Like everything else in personal finance, there is no magic bullet that solves challenges with inflation. Inflation occurs in a healthy economy – wages increase, individuals have more spending power, the costs of goods naturally increase. The pain comes when inflation outpaces wage growth, which, thankfully, is like Romeo Void’s “A Girl in Trouble.” You know, it’s a temporary thing. Being thoughtful and intentional in your spending and saving habits will make the emotional roller coaster of inflation feel a bit less jarring and eventually most of us will get on the winning side of the wage growth versus inflation equation.