If inflation shrinks your budget, here are 3 ways to fight back

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Inflation is rapidly raising household prices in key areas of their monthly budgets – energy, food and housing. This makes it difficult for consumers to avoid a financial hit, even as wages also increase at their fastest pace in years.

But there are levers that can attract Americans – relative to their jobs, investments and expenses – that could help, according to financial advisers.

“I liken the situation to being at sea in a small boat in the midst 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 ocean, but you can control what you do on your small boat.”

The Consumer Price Index jumped in March 2022 by 8.5% from a year earlier, the fastest increase of 12 months since December 1981, the U.S. Department of Labor said Tuesday.

The index is a measure of rising prices across a swath of U.S. goods and services. A basket of items that cost $ 100 a year ago would cost an average of $ 108.50 today.

Gasoline, shelter and food were the biggest contributors to rising costs last month, the Labor Department said.

These categories have a major impact on the typical American: Housing, transportation, and food account for nearly two-thirds of the average household budget by 2020.

“Households have to make it very difficult [financial] decisions day in and day out, “said Greg McBride, chief financial analyst at Bankrate, about inflation.

Food, energy and housing

Specifically, “food at home” prices (i.e. grocery bills) have been up 10% over the last 12 months, the largest annual increase since March 1981. Costs have been up over all major food categories, the Labor Department said.

Component costs such as rent have meanwhile increased by 5% in the past year, the fastest annual rate since May 1991.

And household energy costs such as electricity and natural gas rose 11.1% and 21.6% respectively in the last year. Meanwhile, prices at the pump are up 48%.

Power is transferred to employees in an important way. Take advantage of this rare moment to make sure you get what you are worth.

Andy Baxley

certified financial planner at The Planning Center

Russia’s invasion of Ukraine was a major contributor to inflation in March, particularly for gasoline prices. (Gasoline accounted for more than half of total inflation last month, although prices have recently fallen 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 was still high before the war in Europe, a function of demand that exceeded supply since the US economy rose in early 2021.

Initially, consumers had a lot of money to spend and global supply chains could not keep up.

That dynamic is still present, as Covid cases abroad, for example, cause lockdowns and stop production. Labor supply has also not yet been fully recovered, and companies have increased wages to compete for workers; they can pass on these labor costs to consumers through higher prices, for example.

Some economists are optimistic that inflation will peak last month. So-called “core” inflation figures (which strip from the volatile food and energy categories) fell for the second consecutive month, perhaps an early sign of a broader delay.

“There seem to be clear signs of a slowdown there,” said Andrew Hunter, a senior U.S. economist at Capital Economics. “But it will probably stay high by past standards for next year to 18 months because the economy is so strong.”

There are a few steps that households can take to mitigate the financial impact of inflation.

1. Ask for an increase – or switch jobs

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For one, high prices can be eclipsing some good news for workers: The job market is hot. Job openings are near record highs, layoffs are near 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 new-found leverage to make more money, Baxley said.

Workers should ask for an increase or hunt for a higher paying job if their employer is not willing to pay that increase, Baxley said. This is also a good time to negotiate work-related costs – for example, asking to work from home more often can reduce transport time and hence fuel costs.

Taking thousands of extra dollars home in a salary is likely to have a much greater impact on a consumer’s bottom line than other even more useful actions such as buying generic brands instead of “premium” counterparts.

“Power has shifted to employees in an important way,” Baxley said. “Take advantage of this rare moment to make sure you get what you’re worth.”

Save on a High-Interest I-Bond

Second, saving consumers for a purchase in 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 a rate that rises and falls according to the Consumer Price Index, and therefore protects the purchasing power of consumer savings, Baxley said. Investors can save up to $ 10,000 a year.

This should be a bucket apart from emergency savings, because I-bonds lock up your money for at least a year, Baxley added.

3. Gauge your personal inflation rate

Finally, consumers need to examine how they spend money to measure their personal inflation, Baxley said. (Online calculators can help determine this rate.)

The Consumer Price Index is a national average that may not reflect an individual’s situation, such as their wage growth and household costs. Households using public transportation can be isolated from high gas prices, just as vegetarians can also be isolated from the higher relative costs of meat and poultry.

“Find out how inflation hurts your family the most,” Baxley said. “Then you can start looking for replacements and replacements.”

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