How Is Inflation Currently Affecting Your Finances?


In recent months, there has been a tremendous amount of talk about the United States’ high inflation rate. 2021 has broken records for the consumer price index (CPI), which is concerning for many Americans. Some haven’t noticed much of a difference in their finances, while others are feeling great anxiety about their budget. The truth is, inflation will most likely eventually affect everyone’s finances, no matter how much they earn or what they do for a living.

What is Inflation?

To put it simply, inflation raises prices so you spend more on the same products you normally buy. Let’s use a hypothetical example of a five percent year-over-year inflation rate. In this case, if you spent $100 in February 2021, a five percent inflation rate means you would have spent $95 on the same items in February 2020. It’s the decline in the value of a particular currency. For the United States, it’s the lowering value of the U.S. dollar.

Inflation is the reason a fast-food burger is no longer $0.18,1 as it was in the 1970s. Most Millennials and Gen Z people have heard stories of the days where a candy bar was just a few cents and are surprised at the low rates. The truth is, in 20 years we may all look back at prices today and likely be surprised at how little we were spending. Inflation and deflation are constantly occurring, but economic factors can cause them to be nerve-wracking.

What is the Consumer Price Index?

As mentioned above, 2021 has broken records on the consumer price index. The consumer price index, also known as the CPI, is a measure to look at the prices of what consumers pay. When consumers are subject to drastic changes according to the CPI, analysts know there is likely inflation occurring.

The CPI is arguably a great way to understand how Americans’ finances are being affected by the economy. It provides data on how much consumers are spending on categories like food and energy. The May 2021 CPI chart2 shows that all items were 5% more expensive than in May 2020. More specifically, energy was 28.5% higher and food was 2.2% higher. This shows that the United States is under severe levels of inflation, particularly with energy.

What Is Causing Inflation in 2021?

In May of 2021, Americans were subject to a five percent inflation rate3 – the highest it had been in 13 years. It’s no secret that COVID-19 had a detrimental impact on the economy and the way consumers spent their money. So, many analysts point to that being the reason behind the surging levels of inflation.

Other analysts4 point to the higher costs of production today. COVID-19 disrupted the supply chain greatly, making it more expensive to create and ship goods. When it costs more to buy a particular good in order to create a product (such as one part of a child’s toy), a company is forced to raise its prices for consumers. Not to mention, the energy it takes to produce the toy’s part is 28.5% higher, so the supplier will need to charge more to keep production going. So, in turn, everyone is spending more money – suppliers, sellers, and consumers.

How Does Inflation Affect Your Finances?

While a two to five percent increase may not sound like a lot initially, the extra expenses add up greatly over time. Inflation has a much larger impact on your finances than you may expect. Although you may not notice it initially, you may look back later on and realize just how much more you had to spend this year.

Shrinkflation

Some companies understand that consumers are paying close attention to prices when there is talk about inflation. They know they are competing to get the attention of the money-conscious consumer. So, in order to keep prices low but still remain profitable, companies will give less of the product. For example, an article from NPR5 points out that Cheerios and Cocoa Puffs’ family size packages shrunk from 19.3 ounces to 18.1 ounces. This enables the company to keep prices low so consumers pay for it, but continue to make profits.

Although about one ounce of cereal doesn’t make a vast difference, it’s important to note that you are getting less than what you are used to at the same price for many items. The same NPR article points out that toilet paper rolls and ice cream packages are getting smaller and smaller as well. This means you will have to buy more of the product more frequently. So, shrinkflation is just another way your budget is affected by inflation long-term.

Lowering Your Savings

If you have a savings account or an emergency fund, your dollars there face inflation as well. Perhaps you have six months’ worth of expenses saved up in case of an emergency. You may want to recalculate how much you are spending under the new levels of inflation because your old calculation may no longer be accurate. Today, you are spending more on everything from food to gas and utilities. So, you may need around five percent more in your emergency fund to be safe.

On the other hand, if you have been putting money aside to prepare for retirement in a 401(k) or another retirement account, your money there may also be affected. Hopefully, the inflation rate will stabilize over time so you won’t have to add five percent to it right away. However, if you want to have additional freedom in retirement, it’s best to save more to plan for future inflation.

Is Inflation Temporary?

Many Americans are hoping that this 13-year high inflation rate is only temporary. Much of this hope comes from the Federal Reserve’s target of a two percent inflation rate.6 Thankfully, many analysts expect7 these high rates of inflation to stabilize. It’s important to note that the Federal Reserve has procedures in place to ensure the country doesn’t go into an economic depression again. So, rather than having anxiety over your budget, try to save as much as possible and wait out these inflation rates.

If you need help strategizing your wealth and investments, our financial professionals are here for you. We can advise you on how to make the most of your income during times of high inflation and can help you prepare for retirement despite future inflation rates.

 

1 “Here’s what a fast-food burger cost the year you were born” Janaki Jitchotvisut insider.com, Sep 28, 2018

2 “Consumer Price Index” Anonymous Bureau Of Labor Statistics, June 6th 2021

3 “Inflation Spikes in May at an Annual Rate of 5%, Testing Markets and the Fed” Tim Smart usnews.com, June 10th 2021

4 “Pandemic Prices: Assessing Inflation in the Months and Years Ahead” Jared Bernstein and Ernie Tedeschi The White House, Apr 12, 2021

5 “Beware Of ‘Shrinkflation,’ Inflation’s Devious Cousin” Greg Rosalsky npr.org, July 6, 2021

6 “Two Percent Inflation Over the Next Year: Should You Take the Over or the Under?” Kevin L. Kliesen research.stlouisfed.org, May 19th, 2019

7 “United States Inflation Rate” Anonymous tradingeconomics.com, June 2021

About Dayton & Sydney

Dayton & Sydney Wealth Strategies Group is a financial advisory company built on a legacy of hard work and customer service. As an elite producer group of AXA Advisors, we use a solid, innovative and long-term approach to help you accomplish your biggest dreams.

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