Stay on Budget Even During Times of Inflation

Wednesday, July 27, 2022
   
gas pump

As we get back to normal after the pandemic, demand for goods and services is up, but supply is down. This has led to a high rate of inflation that we haven’t seen in decades. Just about everything costs more today, and you may have to make difficult choices. But there are ways to stay on budget.

A Simple Definition of Inflation

Inflation happens when prices rise on most goods and services, sometimes very quickly. When it occurs, the purchasing power you have declines. It takes more money to purchase the goods that you buy every day.

For example, look at gas prices, which average around $4.50 a gallon nationally as of this post. Compare that to the $2.80 average cost of a gallon a year ago and you get nearly a 50 percent increase. In other words, if you spent $35 to fill up your tank last year, this year, the cost is more than $52! Many factors are contributing to the rise in gas prices, including conflicts in Europe, but inflation is also playing a large role.

And it’s not just gas that has increased. “Inflationary periods” refer to a rapid increase in prices on most goods and services. So all the costs in your budget rise at once. Housing costs, cars, food, and almost everything else have become more expensive.

How bad is inflation right now?

Overall, February’s annual adjusted inflation rate was 7.9%, the largest year-on-year increase since February 1982. So, prices haven’t risen this quickly since 40 years ago.

Although there is always some inflation—prices generally rise over time—the inflation we see now is cause for concern. People are having a hard time maintaining a budget, and it’s especially challenging for those that still haven’t recovered to their normal income because of the pandemic.

Why Has The Inflation Rate Increased So Dramatically This Year?

This year, we had the “perfect storm” for inflation pressure. There’s been a decreased supply at the same time as increased demand for most products. So, there isn’t just one reason for increased inflation; there are several:

1.    Supply chain issues – Factory shutdowns and slowdowns during the pandemic mean fewer products were produced. Now shipping ports are backed up as factories try to make up for those losses. Problems with the supply chain mean that the quantity of just about everything we want is limited. When supply is limited, the prices go up.

2.    Computer chip issues – Many products use some type of computing chip. But because of a global computer chip shortage, production isn’t fast enough to meet consumer demand.

3.    Energy production – During the pandemic, energy prices fell sharply as people stayed at home. Refineries and oil production were taken offline. Because of reduced production in the U.S. and OPEC nations and increased demand, oil prices have gone up. That affects fuel costs, as well as the cost of goods because manufacturing costs have risen as well.

4.    Worker shortages – The “great resignation” of 2021 means that many companies are understaffed and forced to raise wages to attract new workers. That translates to higher prices.

5.    Money supply increase – Money supply refers to the total amount of money in circulation. From 2015 to 2020, the money supply had an average annual growth rate of 3-7%. However, it has gone up to about 22-31% since the pandemic. This rapid increase can devalue the dollar.

When Will Inflation End?

As supply chain issues get resolved, energy prices stabilize, and workers find their new jobs, we should see inflation easing toward the middle of 2022. This would mean prices would start to drop, although they are unlikely to fall to their previous levels.

The Federal Reserve started to raise interest rates, a standard solution to combat inflation. Of course, this means that lenders and credit card companies would raise the rates they offer consumers. So, easing inflation would give your budget some relief, but then the cost of credit would increase.

What to Do in The Face of Rising Prices

Prices are up everywhere, which means nearly every part of your budget may be affected. You’ll need to do a lot more planning and budget this year if you want to avoid serious debt.

When shopping, look online to find the best deals, even if you plan on shopping in a physical store. Use coupon codes, rebates, and price drop alerts as much as possible to keep costs as low as possible. When driving, try to combine trips to save on fuel usage. Before you buy something, ask yourself if the purchase is within your budget and if it’s needed.

Be disciplined

You need to implement tight controls, keep your discipline, and shop for the very best deals as early as you can. Set a spending plan and don’t deviate from it.

Find ways as a family to cut back and share costs

As a family, you should be discussing your weekly or monthly budget and have everyone agree on what is truly important. Many people focus on the next shiny object that comes along, but that is a disaster for your budget.

Your family can get together to discuss what is truly necessary. Check over unnecessary steaming and other memberships; if no one in the family has used the services in more than a month, cancel the subscription. As a parent, lead by example and cut down on luxuries.

Keep credit card debt minimized to avoid extra bills

Remember that you borrow money every time you use your credit card, typically at high rates, if you don’t pay the full balance off by the due date. Make sure that whatever you spend, you can pay it off on the due date to avoid that high interest.

You Have Help

If you face challenges balancing your budget and are unsure how to pay your bills, you can talk to a certified credit counselor through ACHIEVE's KOFE portal. At no cost to you, a certified credit counselor can help you plan your budget and help you explore options for paying off the debts you have.

KOFE also has valuable financial tips that you can use to update your budget and find new ways to save.

KOFE FINANCIAL EDUCATION RESOURCES