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What causes inflation and what to do about it

Pink inflation 9.1% (will open in a new tab) between June 2021 and June 2022, the highest in 40 years.

You most likely see the effects of these price spikes in your daily life when you shop for groceries, gas, and other essentials.

If you’re worried about how inflation might affect your wallet in the long run, you’re not alone. According to Pew Research (will open in a new tab) held in May, 70% of Americans say inflation is one of the biggest problems facing the country.

In this article, we will delve into what inflation is, how long it can last, and what steps you can take to make your dollar rise further.

What is inflation?

Inflation is an increase in the prices of goods and services in the market. The consumer price index (CPI) is often used to measure the change in the cost of goods over time.

You need $10,000 today to buy what $8,953.01 could buy three years ago.

As inflation rises, our purchasing power falls and our dollar doesn’t go that far. For example, today it would take you $10,000 to buy something that could have been bought for $8,953.01 three years ago.

If wages don’t rise with inflation, it becomes harder to pay for day-to-day expenses, which many Americans are currently experiencing. According to a survey by Capital One Insights Center (will open in a new tab)only 18% of consumers believe that their salary corresponds to their cost of living.

In February, 26% said they had missed at least one bill in the month before, and 27% said they borrowed money to pay.

These numbers paint a grim picture, but inflation isn’t always bad. A certain level of inflation is a sign of a growing economy, and the Federal Reserve aims to keep inflation around 2%.

When inflation rises too fast, consumers and businesses can run into financial trouble, and the job of the Federal Reserve is to create monetary policy that keeps inflation in check and stabilizes the economy.

What causes high inflation?

Many different economic factors can contribute to an increase in inflation, but in general, the main causes of inflation can be divided into two categories:

  • Cost inflation: When the prices of products and services rise due to rising production costs, these additional costs are passed on to consumers.
  • Demand-pull inflation: when demand for products increases and prices rise because production cannot meet the demand.

Why is inflation so high now? The combination of cost-push and demand-push inflation is thought to be pushing inflation rates to levels not seen before in decades. Over the past few years, money saved from staying at home and low interest rates have put some money in our pockets.

As people began to resume working outside the home, demand for products and services skyrocketed, but companies faced supply issues and staff shortages.

Plus, the turmoil around the world, including the war in Ukraine, contributed to the rise in gas prices. Each variable created a recipe for rising prices.

When will inflation drop?

Experts predict that inflation will decline gradually over several years, rather than all at once. To combat inflation, the Federal Reserve announced an increase in the target federal funds rate in March, May and June.

The increase in benchmark rates aims to make credit more expensive, creating an environment in which consumers and businesses spend less, which could cool the market.

However, the rate hike alone did not quickly resolve other supply issues, and it may be some time before consumers get a reprieve from high prices.

5 ways to manage your finances in the face of rising inflation

We can’t control inflation, but there are tactics we can use to make the most of our money while commodity prices are high. Here are the steps you can take.

Make sure your salary is competitive

The job market is still hot right now. Suppose your salary is no longer enough for a comfortable existence.

In this case, you can try to negotiate a raise, apply for a new position, or explore what pay packages other employers have to offer. Opening a side business or part-time job is another way to earn extra income.

Postpone major purchases

If you’re in the market for goods that are expensive right now (like houses or used cars), postponing your purchase until the market cools down can help you save money.

Shop where discounts

Using smart trading strategies like a Costco membership to take advantage of cheaper gas or using a gas reward card can help you save money or earn rewards that can be redeemed for cash or gift cards.

There may also be some benefits that you do not use. For example, Amazon Prime members can now get a year of free access to GrubHub Plus. (will open in a new tab) for food delivery. We also have a roundup of the best Prime member perks to get the most out of your membership.

Pay off revolving debt

As the Fed rate increases, interest rates on credit cards and other lines of credit can also increase, making top-ups more expensive. Try paying off your credit card balances to save on interest.

Diversify your investments

Consider adding investments that benefit from inflation, such as real estate, to your portfolio. Buying Real Estate Investment Trusts (REITs) is a way to invest in real estate without actually buying the property. Short-term bonds and commodities can be other investment options in times of high inflation.

Should we be afraid of inflation?

Inflation is important to factor into your financial planning, but don’t panic. Now is the time to review your budget and make adjustments.

It’s also worth doing an investment review to make sure your assets are allocated in a way that maximizes returns without taking on too much risk.

Talking to a financial advisor can help you develop a financial plan that suits your risk tolerance and makes sense for your investment goals and timeframe.

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