No. 3
If you have been listening to or reading the news of late, you have likely heard the term inflation used a lot. Inflation hasn’t been a problem in the U.S. since the 1970s, but in the past year or so it has risen to 7%.
Inflation, simply put, is a hidden tax on just about everything that you purchase. It eats away at your buying power, which means that things like gas and electric, groceries, and other consumer goods all cost more. If you are one of the fortunate people who got a raise recently it didn’t help you much in terms of being able to buy more or even save.
What is the cause?
High demand for goods and less supply of those goods. There is a lot of money in peoples pockets, caused by a combination of government stimulus checks and the fact that people haven’t been able to go to restaurants, stores, or travel. People now want to spend that money, but business shut downs and issues at the ports ,where goods come in for overseas, have caused supplies to be short. Thus, less supply of goods and lots of demand. When that happens the price of those items increases. For example, used cars, and the few new cars that are available, are selling for premium prices because cars breakdown or come off lease and people have no choice but to purchase one. When there are more people who want cars than there are cars available for purchase, the price of those cars rises.
In the 1970s, a perfect storm of economic and political events conspired bring about a recession at a time of extremely high inflation. This combo of slow economic growth and inflation is called “stagflation.” My mom used to go shopping with a simple adding machine in her hand in order to know when she had to stop shopping and put things back on the shelf. Mortgage rates were upwards of 16%. For context, today interest on a 30 year mortgage is still less than 4%.
I don’t think things will get as bad as they were in the 1970s, but it is important for you to understand how inflation works and how it affects what you can and cannot buy.
Go through your budgets and take note of what and where you are spending. Know that for the time being gas and food will cost more. If you have to use a car to commute just be smart about where you are buying gas and how much you are paying. When you go shopping, pay attention to what items cost and look for substitutes that are less expensive. It may also mean that you have to find savings in other places, like dining out less, or finding less expensive alternatives to entertainment.
When will it end?
I don’t really know, but hopefully the Federal Reserve will raise interest rates, which should stem the growth of inflation. The risk is that if they raise rates too fast it could slow growth and we could find ourselves in a recession. Most economists that I read do not think there is a high chance of this occurring, but some believe that they Fed may only try to get inflation down to about 4% and not the 2% that they have sought in the past. This means that some inflation may be with us throughout 2022 and perhaps even 2023.
Until then be aware of what you are buying and what you are paying. One thing you can’t do is just keep spending and not paying attention to what it cost to live. Hopefully, this is a short-term problem that will change later this year.