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Inflation is rapidly raising the prices for households in the core areas of their monthly budgets – energy, food and housing. This makes it difficult for consumers to avoid an economic hit, even if wages also rise with the fastest cut in several years.
But there are levers that Americans can pull – relative to their jobs, investments and expenses – that can help, according to financial advisers.
“I’m like the situation of being out at sea in a tiny little boat in the middle of a terrible storm,” said Andy Baxley, a Chicago-based certified financial planner at The Planning Center. “You just have to control what you can control.
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“You can not control the storm or the sea, but you can control what you do on your little boat.”
The consumer price index rose by 8.5% in March 2022 from a year earlier, the fastest increase in 12 months since December 1981, the US Department of Labor said on Tuesday.
The index is a measure of rising prices across a range of US goods and services. A basket of goods that cost $ 100 a year ago would cost $ 108.50 today on average.
Gasoline, housing and food were the biggest contributors to rising costs last month, the labor market department said.
These categories have a major impact on the typical American: Housing, transportation, and food accounted for nearly two-thirds of the 2020 average household budget.
“Households have to make it very difficult [financial] decisions day in and day out, says Greg McBride, financial analyst at Bankrate, about inflation.
Food, energy and housing
Specifically, the prices of “food at home” (ie grocery bills) have increased by 10% in the last 12 months, the largest annual increase since March 1981. Costs increased in all major food categories, the Ministry of Labor said.
Shelter rental costs rose at the same time by 5% over the past year, the fastest annual rate since May 1991.
And household energy costs such as electricity and natural gas rose by 11.1% and 21.6% respectively over the past year. At the same time, prices at the pump have risen by 48%.
Russia’s invasion of Ukraine was a major contributor to inflation in March, especially for petrol prices. (Gasoline accounted for more than half of total inflation last month, although prices have fallen recently as oil prices have fallen.)
Russia and Ukraine are also major agricultural exporters, and their conflict is likely to play at least a small role in higher food prices, McBride said.
But inflation had been high even before the war in Europe, a function of demand exceeding supply since the US economy grew in early 2021.
Initially, consumers had a lot of money to spend and global supply chains could not keep up.
That dynamic still exists, as Covid cases abroad cause shutdowns and stop production, for example. The labor supply has not yet fully recovered and companies have raised wages to compete for the workers; they can pass on these labor costs to consumers through higher prices, for example.
Some economists are optimistic that inflation peaked last month. So-called “core inflation figures” (which remove the volatile food and energy categories) fell for the second month in a row, perhaps an early sign of a broader slowdown.
“There seems to be clear signs of a slowdown there,” said Andrew Hunter, a senior U.S. economist at Capital Economics. “But it is likely to remain high by previous standards next year to 18 months because the economy is so strong.”
There are some steps that households can take to mitigate the economic impact of inflation.
1. Ask for a pay rise – or change jobs
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First, high prices may overshadow some good news for workers: The labor market is hot. The number of job vacancies is close to a record high, redundancies are close to historic lows and employers are raising wages rapidly.
Instead of focusing on how much more money is being spent on inflation, workers can use their newfound leverage to make more money, Baxley said.
Workers should ask for a pay rise or look for a higher paid job if their employer is unwilling to pay that pay rise, Baxley said. This is also a good opportunity to negotiate work-related costs – for example, asking to work from home more often can reduce transport time and thus petrol costs.
Bringing home thousands of extra dollars in a paycheck is likely to have a much greater impact on a consumer’s performance than other still useful measures such as buying generic brands instead of “premium” counterparts.
“Power has shifted to employees in a big way,” Baxley said. Take advantage of this rare moment to make sure you get what you deserve. “
2. Save in an I-bond with a high interest rate
Second, consumers who save for a purchase over the next two to three years (perhaps a car or a down payment on a home) can buy “I-bonds”.
These almost risk-free investments pay an interest 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, as I-bonds lock in your money for at least a year, Baxley added.