Inflation and Budgeting
By: Kristen Albertson
What is inflation and why is it important?
Have you ever wondered why prices for goods and services keep going up? Why did a bottle of soda cost about a dime in the 1970s but is worth almost two dollars today?
Inflation is the main cause of rising prices. Inflation is an economic phenomenon whereby the value of money decreases over time, leading to a rise in the cost of goods and services. This is typically caused by an increase in the overall supply of money or a decrease in the value of the dollar. In the United States, a change in the interest rate at which the Federal Reserve allows banks to lend money to one another is directly linked to inflation rates.
When the Federal Reserve lowers the interest rate, banks can borrow more money from each other and lend it to consumers, which increases the overall supply of money in the economy. Low interest rates encourage borrowing and allow more investments to be made in the economy. Increased borrowing adds to the overall money supply and encourages more spending. The increase in the money supply leads to a decrease in the value of the dollar, resulting in inflation.
But what does this mean? When more money is in circulation, it dilutes the value of each individual dollar. With more money chasing after the same amount of goods, prices will naturally go up, resulting in a decrease in the purchasing power of the dollar. This is okay if the rate of inflation is relatively low. However, once the rate of inflation gets above a certain threshold, and wages do not increase to match the rate of inflation, this can cause significant financial stress for the average American household.
Why is inflation so high right now?
Today, American consumers are facing high rates of inflation. For example, a carton of eggs used to cost around five dollars a few years ago, but now it’s up to about eight to ten dollars. Research points to three major reasons why inflation is so high: energy price instability, backlogs in work orders for goods and services brought on by COVID-19 supply chain difficulties, and price variations in the automobile industry. These factors have caused prices to rise and have made it difficult for consumers to afford the goods and services they need. As a result, many American households are struggling to make ends meet.
How can I cope with inflation in my daily life?
So, what are some ways that you can deal with inflation in your life? If at all possible, don’t spend more in a month than you earn. Work up a budget and stick to it! Start by cutting out any excess or luxury spending you may have enjoyed in the recent past. If you still come up short, begin with everyday tactics for reducing spending. Think clipping coupons, buying generic brands when you can, and price shopping or looking for sales at the store. Never buy an expensive item if there is a less expensive alternative, and buy used items when possible. Keep reusable bags readily available so you remember to take them to the grocery store, rather than paying for bags – even 10 cents a bag adds up over the course of a year!
If you haven’t received a raise in the last year or so, try asking your boss for a raise to match inflation. If this doesn’t work, it might be time to seek new employment with more competitive wages. Alternatively, you could look for other ways to increase your income, such as taking on more hours, getting a side job, or starting your own side business. You could also look into government assistance programs or charitable organizations that offer financial assistance.
Conclusion
As an average consumer, it is all but impossible to control the prices that you see at the store, especially with high rates of inflation. However, by applying simple saving strategies, you don’t have to break the bank. Once you have a solid plan in place, you can find ways to save money in times of high inflation without going over your budget.
If you are interested in learning more about personal finance, consider taking our free Money 101 course. This course is available to women who have aged out of the foster care system, have been incarcerated or unhoused, and have been victim to gender-based violence. If you believe you are eligible for our Money 101 course, please email us to register at info@5050leadership.org.
References
Inflation: What It Is, How It Can Be Controlled, and Extreme Examples
