Few economists predict we will return to the double-digit price increases of the late 1970s and early 1980s. But knowing how consumers were doing back then – and how things are different today – can help you formulate a plan to deal with rising prices.
First, an introduction: inflation reduces your purchasing power, so you need more money to buy the same goods and services. With an average inflation rate of less than 2%, as was the case from 2010 to 2020, it would take more than 35 years for prices to double. With inflation averaging 5%, the annualized rate reported in May, prices would double in less than 15 years. This is a big deal when you are living on a steady income or trying to calculate how much you will need in retirement.
“People forget the potential Effects of inflationbecause we really haven’t seen much, ”said Penelope Wang, assistant money editor at Consumer Reports.
Here are some strategies that you may find helpful.
If inflation persists, postponing a purchase can be expensive as the price is likely to rise in the future. With today’s inflation this is less clear.
Federal Reserve chairman Jerome Powell says pandemic-related bottlenecks and bottlenecks are behind recent price spikes. He predicts that inflation will ease as the country’s economy opens up further.
That certainly seems to be the case with timber prices. The cost of wood increased more than 300% from April 2020 to May 2021, which increases the cost of an average home by $ 36,000, according to the National Association of Home Builders. But timber prices have fallen significantly from these highs as the pandemic-induced scarcity subsides. If you rushed into a remodeling project or otherwise held onto the high prices, now you are likely to regret it.
On the flip side, you may want to stock up on meat, poultry, eggs, dairy products, and fresh fruits and vegetables when they go on sale, Wang says. Buying on sale is a smart consumer move in any economy, and the Department of Agriculture recently forecast that prices for these foods will continue to rise this year.
Embrace of substitution
The high inflation 40 years ago gave birth to generic foods – products with strong black and white labels that saved consumers money by eliminating fancy packaging. Today you can see similar savings by replacing branded products with private label products. Warehouses like Costco and Sam’s Club also got their start around this time and are still a good source for bargain hunters.
Buying used items instead of new ones is another way to save money. It used to mean flea markets and thrift shops. Today we can buy used goods from Craigslist, Facebook Marketplace, Mercari and Letgo, among others, or there are Facebook Buy Nothing groups where people give their neighbors articles for free.
On the other hand, thrift stores have benefited from lockdown mess-ups. Barbara O’Neill, a certified financial planner of Ocala, Florida, volunteers at a local thrift store and recently bought a large, curved monitor for her husband’s computer.
“I picked it up for $ 10 and then got half of it because I volunteered,” said O’Neill, author of “Flipping a Switch: Your Guide to Happiness and Financial Security in Later Life.”
Set fixed interest rates on debt
The Fed has so far resisted calls for interest rate hikes to slow the economy and cool inflation. If that changes, floating rate debt could cost more. For example, if you have a variable rate mortgage and good credit, it might make sense to refinance your mortgage into a fixed rate loan, says O’Neill. In the case of credit card debt, Consolidate with a personal loan could give you a fixed rate and incremental payments.
Also, be careful when adding new debt. Inflation, in theory, makes it easier to pay fixed-rate debt because you pay back the loan with cheaper dollars. But new loan payments include a new commitment when you may need flexibility.
Inflation isn’t all bad
Those who are not used to soaring prices will be surprised to find that inflation has some benefits. Getting a raise is often easier because employers can pass the cost on in higher prices (although this can be self-sufficient, with higher prices generating more demand for increases).
In addition, many tax regulations and government benefits are influenced by the consumer price index, the country’s official measure of inflation. Social security benefits include increases in the cost of living, so higher inflation can mean larger checks. The amount you can put into retirement funds, including IRAs and 401 (k) s, is likely to go up as well.
“There are many things that are tied to the CPI that some people can benefit from and help them earn a little more income next year,” says O’Neill.
This article was written by NerdWallet and originally published by the Associated Press.