Understanding How Inflation Impacts Your Budget & Financial Plan

You’ve heard the term “inflation” blamed for everything from higher grocery, gasoline and housing costs, and more.

But a solid understanding of what inflation is and how it affects you is important to your overall financial literacy.

Think of inflation as like being caught in a vise. As too many dollars chase too few available goods and services – the classic definition of price inflation – tight grip threatens to squeeze your household budget, your credit needs, your retirement planning, and your other options for building and sustaining wealth.

Why is there inflation?

U.S. inflation has erupted to record levels after four decades of mostly moderation. The latest spike was seeded by the global economic slowdown during the Covid-19 pandemic that spawned trillions in U.S. government financial relief to citizens and supply-chain disruptions, only to be exacerbated by war between Russia and Ukraine. 

Not much escapes inflation’s clutches. Spiraling costs to fill your tank, feed your family and keep a roof overhead lead a long list of consumer products and services, including mortgages, auto loans, and credit cards, negatively impacted by inflation.

It’s important to understand that a certain level of inflation is baked into all global economies. In the U.S., the pre-pandemic target had been a 2 percent rate of annual inflation. That’s important because businesses rely on their ability to raise prices sufficiently to pay workers and other expenses, and still profit.

Inflation’s worst trait is its erosion of purchasing power for households and businesses. People living on Social Security, pensions or other fixed incomes tend to be most vulnerable during periods of high inflation. Even your favorite bag of potato chips, whose price is unchanged but contains fewer chips – known as “shrinkflation’’ – is more subtle evidence of price inflation.

Not everyone experiences inflation the same

The Federal Reserve Board has tried to corral inflation that during 12 months ended June 2022 hit 9.1 percent -- the highest since 1981.

While inflation news is usually seen as bad, for some it offers good news. Home sellers in most regions of America have benefitted from buyers’ offering full or close to full asking prices despite a parallel rise in interest rates.

Scarcity of new automobiles due to a global microchip shortage has raised the average sale price for new vehicles. The shortage of new autos has caused used-vehicle values too to climb. What’s more, borrowers whose loan rates are fixed benefit from repaying those obligations with dollars whose present value has been eroded by inflation.

Ways to navigate inflation’s rough waters

A basic understanding of inflation and its impact on your daily life can help you manage your savings, debit, credit lines, and household and business expenses. That will enable you to adjust things temporarily so you can continue to live and plan for key life milestones.

Curb expenses:  Now is a good time to review all your fixed monthly expenses: subscriptions for your cellphone, cable TV, internet video streaming and other online services, newspapers and magazines; electric, water/sewer and heating oil, among others. If you’re able to price-shop those services, consider doing so. Also, services you infrequently use should be the first you trim or cut loose. 

Scour for savings: Try cutting your grocery bill using coupons or taking advantage of weekly sales on foods and other items you regularly buy. If your food market also sells gasoline, take advantage of promotions that tie fuel discounts to how much you spend on groceries.

Homeowners may consider refinancing their mortgages into either a lower rate, a shorter payback term, or both. A mortgage refi or a home equity loan both allow you to tap your home’s equity to pay down debt or to spruce it up and ready it for sale.

And don’t forget to swap that high-interest credit card for one bearing a more favorable rate. Many lenders offer cards featuring cashback rewards and other perks – discounts and incentives that can help stretch your inflationary dollars.

Boost “rainy day’’ savings: This may sound counterintuitive, but paying yourself first makes sense, particularly during inflationary cycles. If you don’t already have one, an emergency savings set up at Patriot Bank can provide cushion against unexpected personal, household or business financial calamities.

If you’re nearing retirement, consider stepping up contributions to your Individual Retirement Account or workplace-sponsored 401(K) retirement-savings plan. In doing so, your pre-tax contributions exploit one of the best wealth-building assets available to investors no matter the rate of inflation: Interest compounding.

Invest with an eye on safety: You’re off to a solid start with your bank checking and savings accounts and savings certificates insured to the maximum allowed by the FDIC. With guidance from an expert, you also might explore investing in government or tax-free municipal bonds whose relatively low yields are offset with the knowledge they are backed by the full faith and credit of their issuers.

In addition, certain commodities, such as gold, silver and industrial metals, often serve as inflation hedges because their values tend to rise during steep inflationary cycles. But investing in commodities isn’t for the fainthearted or those without extra funds to invest or investment experience.

While inflation’s jaws will certainly bite into most household and business budgets, you’re prepared to take steps to avoid getting caught in its grip.

At Patriot Bank, we are here for you in good times and bad, and happy to help you navigate these uncertain economic times when you need us.

This article contains information that should not be taken as investment advice.