What You Need to Know About Inflation

You may have heard some talk about inflation recently – or maybe you just took a look at used car prices. Either way, there’s no denying the fact that inflation is becoming a hot topic around the country.

But is all this concern over inflation justified? If so, what’s causing it? More importantly, what can the average consumer do about it?

What Does Inflation Mean?

Inflation refers to the concept that the price of goods and services increases every year. There are multiple causes of inflation that depend on the specific industry and sector. Normally, the annual inflation rate hovers between 1% and 3%, but the Covid-19 pandemic and other factors have caused inflation to skyrocket in the last year.

The Bureau of Labor Statistics monitors the Consumer Price Index (CPI), which tracks the cost of goods and services and is frequently used as an inflation barometer.

As of June 2021, the CPI has increased 5% over the past year, which is the largest yearly increase since 2008. The high inflation rate has hit consumers hard, especially in light of the fact that many are still recovering from losing their jobs during the lockdown.

Why Inflation Matters More Now

Normally, the rate of inflation does not warrant front-page news. But because the cost of some goods and services has increased significantly, many consumers have started to worry.

For example, the cost of lumber rose 300% from February 2020 to May 2021, which caused prices for new home builds and home renovation projects to increase. Data from the Bureau of Labor Statistics found that used car prices increased 30% between May 2020 and May 2021.

As interest rates plummeted during the pandemic, prospective homebuyers raced to find the right house. This caused a sharp increase in housing prices. Rental car prices have also increased as rental companies struggle to afford new cars.

How to React to Rising Prices

If you don’t need to buy a car or a house right now, consider waiting for prices to settle down. It’s not clear how long this will take, so if your 2005 Honda Accord is on its last legs, you may be forced to purchase a car before prices return to normal. The good news is that trade-in cars are worth much more now. If you have a car to sell, now might be the best time to maximize your profit.

“Live your life within your means,” said Certified Financial Planner Christopher Flis of Resilient Asset Management. “If you can afford to pay the current price for a car because you need or want one and your budget supports it, that’s fine.”

Deciding whether or not to buy a home right now is a little harder. Because a house is one of the most expensive – and most important – financial decisions you’ll make, consider the pros and cons before making a decision.

Flis said consumers can still buy a home, but they should ensure that the monthly payment fits their budget. They should not consider a home as part of their investment strategy. It’s almost impossible to predict housing values, so you never know if prices will continue to rise in your area or drop suddenly.

If local housing prices crash, you might end up underwater on your mortgage. This means the mortgage balance is higher than the home’s value. It’s almost impossible to sell a home that’s underwater, because you’ll need to pay the difference between the loan balance and the sale price.

Flis said he recently spoke to a couple who bought a house four years ago for $200,000 in North Carolina. They recently sold it for $515,000.

“In that town in North Carolina, if you’re paying $515,000, you might run the risk of being underwater in the near term,” he said.

Before buying a home, consider how long you plan to live in that area. If you don’t plan to stay there for at least five years, don’t buy the house. If you need to sell it and discover it’s worth less than you owe, you’ll be stuck unless you can come up with the difference yourself.

Start a Budget

If you haven’t started budgeting, it might be time to start. While budgeting won’t address the systemic problem of inflation, it can help you mitigate its effects on your financial health. Tracking your expenses regularly can help you notice areas where costs are rising, allowing you to divert money from other categories to address the discrepancy.

To create a budget, make a list of your basic spending categories. These can include:

• Housing
• Transportation
• Insurance
• Utilities and internet
• Debt payments like student loans, personal loans and more
• Groceries
• Entertainment
• Childcare
• Saving and investing
• Charity and gifts

Then, go through your bank and credit card accounts for the past three months to get an average of how much you spend for each category per month. Input the averages in the Mint app and it will calculate the monthly total.

Compare that to your monthly net pay, which refers to your income after taxes. You can find this information on your pay stub. If you’re self-employed, a gig worker or a contractor, use the average amount you earn per month as your baseline net income.

If the total expenses exceed the total income, you’ll have to cut back in certain areas. Start by trying to make big changes, like refinancing high-interest loans or downsizing to a less expensive apartment. Those will have a bigger impact on your budget than clipping coupons or switching to generic brands.

Next, start tracking and categorizing your expenses a few times a month. If you notice that you’re about to overspend in a certain category, see where you can cut back.