Inflation – What is it?

One thing that we all know for sure is that the price of goods is going up. A gallon of milk in 2020 cost $3.32. Over the past year it increased by 6.9% to $3.55 per gallon. The increase in the cost is referred to as inflation. The Bureau of Labor Statistics (BLS) defines inflation as the overall upward price movement of goods and services in an economy. 

Often referred to when we discuss inflation is the Consumer Price Index (CPI). This is the change overtime in the prices paid for a basket of consumer goods and services. Those items fall into eight major groups; food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services.

There are a lot of factors that impact the costs of goods. Simple things like the increase in cost of labor and materials make the price go up. If the workers are paid more than the price will increase to offset the increased expense or the price of gas to transport, will increase price. Then there are more complicated issues like interest rates, government policy, and supply vs. demand. In general, an inflation rate of 2% would be considered average. Right now, the inflation rate in the United States is around 7% to 8%. For most of us, our salaries have not increased at the same rate, meaning we have less money. This is why it is important to start tracking your money.

Now I could go down the road that you need to create a budget, but I am not going to do that. Instead, I will respond with a question. When the cost of goods you typically buy (like gas and groceries) go up, where will you get the money to pay for those goods? 

The answer is you will need to increase income (money you make) or decrease expenses (buy less). Unfortunately, you’re not likely to get a raise at work that will cover the increased costs. Your other income options include getting a new job that pays more, getting a side job, or selling goods you no longer need or use. Options to decrease expenses often involve a change in habits. Some good habits include being a frugal shopper by looking for deals, eating out less, consolidating trips, and evaluating your wants vs. needs. Some not-so-good habits include not tracking your expenses, using credit cards, paying your bills from your savings, and reducing your savings. 

At this point, you may consider making some changes to your personal finances. There are lots of good materials out there. One source that I like to share is the Your Money Your Goals toolkit, by the CFPB. The toolkit includes tools and handouts to set goals, track income, pay expenses, and plan your spending.

Small Savings Go a Long Way – Fighting Against Inflation

When I first thought about this blog, I was thinking about strategies to save. When I started typing, my mind went from strategies to save, to strategies to adjust for inflation.

Inflation is the price change of goods over a period of time. In other words, when you bought a gallon of milk a year ago, does it cost the same today? Compared to last year, the price of goods has increased 4.4%, a 30 year high. The typical inflation rate runs about 2%. This means that your salary needs to increase at the same rate to keep a balanced budget. Unfortunately, that usually does not happen which means we need to cut expenses or seek additional income.

Since my title is Small Savings, let’s focus on sharing some small ideas to cut expenses. Reflecting on your habits is a good place to start. Many of us buy coffee, so let’s start there. If your coffee cost between $2-$5 and you buy one every day, that will cost you between $730-$1,825 a year. How about eating out? If we spend $42 eating out every week, that totals $2,190. As you can see, small changes can save a lot of money over the course of a year. Reflect on your habits and make changes that lead to small savings.

High inflation is likely to continue for the coming months. This means we need to adjust our financial behaviors to insure the money we make (income) remains in line with the money that goes out (expenses). If you have a budget, great, but be sure to monitor it for changes. If you don’t have a budget, the Consumer Financial Projection Bureau has some great resources.

For additional ideas to save money visit Nerdwallet, The Semple Dollar or Ramsey Solutions for ideas.