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Inflation is rapidly raising prices for households in core areas of their monthly budget – energy, groceries and housing. That makes it hard for consumers to avoid a financial hit, even as wages also rise at the fastest pace in years.
But there are levers Americans can pull — relative to their jobs, investments, and spending — that financial advisors say could help.
“I liken it to being at sea in the middle of a terrible storm in a tiny little boat,” said Andy Baxley, a Chicago-based Planning Center certified financial planner. “You just have to control what you can control.
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“You can’t control the storm or the sea, but you can control what you do on your little boat.”
The consumer price index rose 8.5% year-on-year in March 2022, the fastest 12-month gain since December 1981, the US Labor Department said on Tuesday.
The index is a measure of rising prices for a range of US goods and services. A shopping cart with items that cost $100 a year ago would cost an average of $108.50 today.
Gasoline, shelter and groceries were the biggest contributors to rising costs last month, the Labor Department said.
These categories have a major impact on the typical American: housing, transportation, and food accounted for almost two-thirds of the average household budget in 2020.
“Households are having a very difficult time [financial] decisions every day,” said Greg McBride, Bankrate’s chief financial analyst, of inflation.
food, energy and housing
In particular, home food prices (ie grocery bills) have risen 10% over the past 12 months, the largest annual increase since March 1981. Costs have risen in all major food categories, the Labor Department said.
Meanwhile, the cost of accommodation, such as rent, rose 5% last year, the fastest annual pace since May 1991.
And household energy costs such as electricity and natural gas have increased by 11.1% and 21.6%, respectively, over the last year. Meanwhile, prices at the pump are up 48%.
The power has shifted to the employees to a significant degree. Seize this rare moment to make sure you get what you’re worth.
Andy Baxley
Certified Financial Planner at The Planning Center
Russia’s invasion of Ukraine was a major contributor to inflation in March, particularly in gasoline prices. (Gasoline accounted for more than half of headline inflation last month, although prices have fallen recently as oil prices have fallen.)
Russia and Ukraine are also big agricultural exporters, and their conflict likely plays at least a small role in higher food prices, McBride said.
But inflation was already high in Europe before the war, a function of demand exceeding supply since the US economy started up in early 2021.
Initially, consumers had plenty of money to spend and global supply chains couldn’t keep up.
That momentum is still there with, for example, Covid cases abroad leading to lockdowns and halting production. Labor supply has not fully recovered either, and firms have raised wages to compete for labour; they can, for example, pass these labor costs on to consumers via higher prices.
Some economists are optimistic that inflation peaked last month. So-called “core” inflation numbers (which exclude the volatile food and energy categories) fell for the second straight month, perhaps an early sign of a broader slowdown.
“There seems to be clear signs of a slowdown there,” said Andrew Hunter, a senior US economist at Capital Economics. “But it’s likely to remain high by previous measures for up to 18 months next year because the economy is so strong.”
There are some steps households can take to mitigate the financial impact of inflation.
1. Ask for a raise – or change jobs
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For one, high prices could eclipse some good news for workers: The job market is hot. Job openings are near record highs, layoffs are near historic lows, and employers are raising wages fast.
Instead of focusing on how much more money is being spent due to inflation, workers can use their newfound leverage to make more money, Baxley said.
Workers should ask for a raise or look for a higher-paying job if their employer is unwilling to pay that raise, Baxley said. This is also a good time to start negotiating work-related costs – for example, asking to work from home more often can reduce transport time and thus fuel costs.
Taking thousands of extra dollars home in a paycheck is likely to have a much bigger impact on a consumer’s bottom line than other still-useful actions like buying generic brands instead of “premium” counterparts.
“There has been a big shift in power to employees,” Baxley said. “Seize this rare moment to make sure you get what you’re worth.”
2. Save in a high-yield “ego bond”
Second, consumers who are saving for a purchase in the next two to three years (perhaps a car or a down payment on a house) can buy “I-Bonds.”
These near-risk-free investments pay a rate that rises and falls according to the consumer price index and therefore protects the purchasing power of consumers’ savings, Baxley said. Investors can save up to $10,000 per year.
This should be a bucket separate from emergency savings because I freeze your money for at least a year, Baxley added.