If you’ve been to the grocery store, gas station, or just paid a bill lately, it’s hard not to notice the effects inflation is having on our wallets. In fact, we are currently facing the highest annual inflation rate in 40 years, and according to the Labor Department, consumer prices have jumped 8.6% since last year!

In addition to record level inflation, the Federal Reserve is projected to continue increasing interest rates for the foreseeable future.

With high inflation, increasing interest rates, and the rising cost of living, now is the time to discuss how these economic factors will affect your wallet and what you can do to fight back against them.

What is inflation?
What causes inflation?
How does inflation affect you?
What can you do to fight inflation?

What is Inflation?

The textbook definition of inflation is “a general increase in prices and fall in the purchasing value of money.” In other words, your money buys less goods and services than it did in the past.

Inflation can also be considered an “unofficial tax” on your income. The reason inflation can be considered an unofficial tax is because it’s the result of government fiscal policies which have decreased the value of the dollar by pumping more of them into the economy to chase fewer goods.

So, you might be asking “what does all of this actually mean, and what’s causing this inflation thing to happen in the first place?” Well, I’m glad you asked because that leads into our next point…

What Causes Inflation?

Inflation occurs when more money is pumped into the economy without an increase in the amount of goods available. This affects you because inflation causes prices to increase due to the demand in the economy outpacing supply.

Inflation is also raising the cost of goods fastest in the areas that effect all of us the most: housing, utilities, food and transportation. There are a number of factors that have led to our current inflationary period, some of those include:

During the past two years $1.9 trillion was injected into the economy through COVID-19 stimulus legislation, meaning there’s more money in the economy.
The current supply chain crisis at U.S. ports have caused a backlog of goods hitting the market, meaning businesses don’t have the goods necessary to meet demand.
Low interest rates since 2009 made money is cheap to borrow so more people and businesses were taking out loans, circulating more money into the economy.

Now let’s talk about how all of these factors that contribute to inflation eventually affect you.

How Does Inflation Affect You?

While the causes of inflation may be out of your control, unfortunately you will feel the repercussions of it through:

Higher prices
Decrease in purchasing power
Effect on wages
Financial lost for savers and retirees
Increase in cost to do business
Interest rate hikes

Higher Prices

There is no way around it, prices have increased everywhere you go over the past year. One of the first ways you’ll be affected by inflation is through higher prices. You can see it at the pump with national gas prices topping $5.00 for the first time, or at the grocery store where we’ve had the largest 12-month cost increase since 1980.

Decrease in Purchasing Power

A decrease in purchasing power means the amount of goods you can purchase now is less than what you could’ve purchased the same time last year with the same amount of money. An example of this is if it used to cost you $30 to fill up your gas tank, but now it costs you $50 for the same amount of gas.

“Today’s price is not yesterday’s price” — Fat Joe

Effect on Wages

One of the most disrespectful ways that inflation rears its ugly head is its effects on wages. For example, if you received a 5% pay raise this year, but inflation is currently sitting at 8.6%, you’ve effectively taken a 3.6% pay cut because your wages aren’t keeping up with inflation and the purchasing power of every dollar you earned has decreased.

Financial Lost for Savers and Retirees

Similar to how your wage takes a hit if it doesn’t keep up with inflation, well the money you have in your savings account is also losing its purchasing power if the interest rate on your account is less than the inflation rate.

So, while the dollar amount in your savings account might still be increasing, the amount of goods and services you can purchase with those dollars is decreasing.

If you’re a retiree or on a fixed income you’re especially stuck between a rock and a hard place because the prices of goods continue to increase, while your income stays the same. This means that it’ll be difficult to maintain the same standard of living because inflation is cutting into your purchasing power.

Increase Cost to do Business

If you’re a small business owner you have likely seen an increase in cost of goods and labor. This will affect your customers because you’ll probably need to raise prices to cover the increase in expenses. This could potentially lead to you losing customers who might decide to shop around for a better deal or decide they can do without your product or service until the economy turns around.

Interest Rate Hikes

The Federal Reserve recently announced that they’ll continue to rise interest rates which means that the cost of borrowing money will increase. If you’re consider taking out a loan for a car, mortgage, or business be prepared to pay more money to pay back that loan.

Now that you know what inflation is, what causes it, and it how it affects you, now it’s time to discuss actions you can take to keep inflation from negatively effecting your standard of living.

What Can You Do to Fight Inflation?

You can’t control the affects inflation has in the general economy, but you can control how much inflation will affect your wallet.

In order to combat inflation, you need to adjust the way you manage the three primary areas of your finances that you have control over: how much money you make, how much money you save and invest, and how much money you spend.

Control How Much Money You Make

The best way to fight inflation is to increase your income and earning potential.

No matter what condition the economy is in, investing in yourself is always a surefire way to increase your income. Investing in yourself might look like upskilling in your current job so you’re in a position to ask for a raise or promotion, taking on a part-time job or side hustle to earn some extra income, or finding a new job that pays you more money.

Control How Much Money You Save and Invest

During inflationary periods one of the first areas people cut in their budgets is the amount of money they save and invest. While this makes sense because your living expenses cost more, it can also be hugely detrimental to your wealth building process and set you back in the long run.

Have you ever heard anyone use the phrase “buy low, sell high”? Well times like this, when there is fear in the market and asset are selling off at a discount, is what that phrase is referring to. If you can stomach the fluctuations in the market and ride the wave until the economy eventually recovers, now is the perfect opportunity to invest while prices are low so you can sell high later.

Here are some ideas of financial asset that do well during inflationary times:

Treasury Inflation Protected Securities (TIPS)

Treasury Inflation Protected Securities, or TIPS, are government backed bonds with a fixed interest rate paid twice a year with inflation protection built-in. TIPS are designed to protect you from inflation because the principal, the original sum used to purchase the bond, is adjusted for inflation based on the Consumer Price Index.

TIPS are great assets to invest in if you’re risk-averse or simply want to protect your initial investment from the effects of inflation.

Commodities

Commodities are considered a hedge against inflation because they tend to rise in value with inflation. This is the case because commodities are the inputs necessary for manufacturing, so when prices rise so does the cost of commodities.

During high inflationary period, oil, industrial metals, and precious metals are the strongest performers.

Banks

Bank stocks do well when interest rates rise. With the Federal Reserve planning to continue increasing the interest rate to combat inflation, now is a good time to begin looking at the banking sector to invest in.

Stocks

Invest in companies with low capital needs. Companies that can retain their earnings without the need to invest more money as prices continue to raise are in a stronger financial position than companies that need to continue to invest during inflationary periods.

Look for businesses that can continue to raise their prices and not lose customers or business to competitors. These companies can offset the effects of inflation by raising prices. Businesses like oil companies, utilities, and companies that make household items like toilet paper or razor blades all tend to maintain their value.

Control How Much Money You Spend

The areas where inflation is being felt the most are in housing, utilities, food, and gas prices. Here are some tips to help you take control of these areas back from inflation.

Housing

For most people housing is their biggest expense, and the one part of their budget that can’t easily be altered. If you’re a renter, here are a few ways you can decrease your bill:

Sign a longer lease if your employment is stable and you plan to remain in your current area. Typically, the longer the lease you sign, the cheaper your monthly rental rate is.
Get a roommate. It may not be the most ideal situation, but there’s no easier way to cut your rent in ½ than to just have a friend, relative, or stranger (if you’re bold) move in with you.
Move. If rent is too much of a burden where you live, consider moving to a new location. Moving a few minutes out of town could lead to hundreds of dollars in savings each month.

If you’re planning on buying a home try and wait until the market cools down. The current rise in interest rates is making it more expansive to borrow money, which means less people will be able to afford a home, eventually home prices will decrease to reflect this change in demand. Also, consider saving for a 20% down payment to avoid paying private mortgage insurance.

Utilities

An easy way to cut down on your energy costs is to only run big appliances like dishwashers, washing machines, or dryers when they are full. Also, be aware of energy vampires — appliances that you keep plugged in all the time that consumer energy even when you’re not using them.

Food

The cost of food at the grocery store has seen the largest 12-month percentage increase since 1980 according the U.S Bureau of Labor Statistics. Here are 10 ways you can save money on groceries and make sure inflation doesn’t eat up your food budget.

How to Save Money on Groceries

Gas Prices

Gas prices national have surpassed $5.00 which means that no matter where you live, you won’t be able to escape the rising cost of fuel. Even though you cannot run away from the prices, unless you really like running, we do have some tips on how you can make sure more of your money is staying in your pocket rather than going in your tank.

How to Save Money on Gas

Check your tire pressure
Don’t idle
Use cruise control
Remove extra weight
Take fewer trips
Service your vehicle regularly
Use the manufacturer’s recommended grade of motor oil
Use apps to find cheap gas
Consider Purchasing a More Fuel-Efficient Vehicle
Know When to Roll Down the Windows Versus Using the A/C

Make sure to check out our article on how to save money on gas to learn more on how to make each of these tip’s work for you and save thousands of dollars a year on fuel!

Cut expenses

Besides cutting costs on housing, utilities, food, and gas you can also save money by:

Searching for coupons or shopping for items while they’re on sale
Cutting back on the number of subscription services you use
Limiting how often you dine out and preparing more homecooked meals
Negotiating discounts with companies such as monthly payment for your car insurance or the APR on your credit card if you’re carrying any debt

FINAL REMARKS

High inflation and increasing interest rates will be with us for the foreseeable future, but that doesn’t mean you have to go into debt to make ends meet. If you actively take control of your finances by increasing your income, lowering your expenses, and maintaining your savings rate, you can combat the effects of inflation and continue on your journey towards financial freedom!