Real-Life Impacts of Inflation
Inflation is a hot topic right now, but how does it actually affect our day-to-day lives? Learn about the real-life impact of high inflation in this guide.
July 18, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.
Inflation is on the rise, and the topic is all over the news. But for many of us, inflation isn’t well understood — and its impact on our day-to-day lives isn’t always clear.
This article will set the record straight on some real-life impacts of inflation. We’ll cover how inflation works, why it happens and how it has affected prices so far. Finally, we’ll discuss how readers can prepare their finances for an inflationary environment.
What is inflation?
Inflation is the gradual increase in prices of goods and services over time. Inflation decreases the buying power of currency — meaning the amount you can buy with $1 decreases slowly over time.
In other words, 10 years ago, $1 could buy substantially more than it can today.
For example, in the year 2000, the average movie ticket cost $5.39. In 2021, the average movie ticket cost $9.16. That’s an increase of over 70% in a 21-year period. It now takes 70% more money to buy the same product.
Inflation is usually measured in percentage terms, referring to the yearly rate of inflation. For example, you may see that inflation is running at 3%. This means that the government has calculated that goods and services are increasing at roughly 3% per year. In this case, something that costs $10 today would likely cost around $10.30 at this time next year.
Why does inflation happen?
There are four main causes for inflation:
Increasing production costs: If the price of producing a good or service increases, companies will pass the cost on to customers in the form of higher prices. Costs can rise due to increasing labor costs, increased supply costs or both.
Increased demand: If demand is higher than supply, prices often rise. For example, if there are 10 houses for sale in a town and 30 buyers, chances are that homes will sell for higher than their asking prices due to bidding wars.
Fiscal policy: Fiscal policy refers to the government’s spending and taxation decisions. If the government spends money to stimulate the economy — as they did during the COVID-19 pandemic — this can accelerate inflation.
Monetary policy: Monetary policy refers to actions that the Federal Reserve takes to achieve economic goals. The Fed can lower interest rates, for example. Lower interest rates encourage businesses and consumers to borrow and spend, which can in turn lead to increased demand and higher costs.
What does inflation mean for the economy?
Inflation is a normal process that happens in most developed economies. Low to moderate levels of inflation are to be expected — but when inflation gets too high, it can be problematic for the economy.
Rampant inflation can lead to rising interest rates, as the Fed changes policy to lower inflation. Rising rates can reduce consumer demand and potentially even lead to a recession.
Real-life examples of inflation
Now we know the concept behind inflation — but what does it actually mean for our everyday lives?
Recently, prices have risen dramatically. We’ll use data from:
From June 2021 through June 2022, food prices increased a cumulative 10.4%. That means that a $100 grocery bill in 2021 would now cost $110.40.
Because this dramatic increase took place over just 12 months, many families have had to adjust their budgets to afford food.
Are grocery prices straining your finances? Check out our guide on how to eat on a budget.
Gasoline prices have been uniquely affected by standard inflation as well as the ongoing war in Ukraine. For many families, rising gas prices have created the most financial strain out of any category.
From June 2021 through June 2022, prices for dining out (restaurant meals and takeout) rose 7.7%. This means a meal that cost $50 a year ago cost $53.85 a year later.
In many areas, restaurant prices have risen even more dramatically — likely due to ongoing staff shortages and increased pay for workers.
From June 2021 through June 2022, prices for all items except food and energy rose 5.9%, on average. This is the average figure for a wide variety of expenses, including shelter, services, vehicles, apparel and more.
The average increase when food and energy are included was 9.1% over the same time period. That means that if your total monthly budget in June 2021 was around $4,000, it’s likely now around $4,364. And for many workers, the cost of living increase in 2022 just hasn’t covered the increase in prices.
How to prepare for inflation
Rising prices can certainly strain your finances, but there are ways to be prepared for what’s coming.
Create a budget — and stick to it
Learning how to budget can help you keep your finances on track. There are many different ways to budget, but the important thing is to learn how to track your spending and make sure you’re staying on budget.
You can use various budgeting tools, such as Mint or YNAB, to help with this. Or you can use the old pen-and-paper approach. Whatever you choose, be sure to check in with your spending frequently to make sure it aligns with your budget.
Prices are rising, but not evenly across the board. Certain retailers are doing a better job of keeping prices stable than others.
In many cases, bulk stores like Costco and Sam’s Club have even better deals now than usual. For non-food items, you could also look at buying used, through platforms like eBay or OfferUp.
Ask for a raise
Rising costs could be one reason that it may be time to ask for a raise. Companies are well aware of rising costs. This, combined with the tight labor market, may mean it’s a good time to ask for a cost of living increase in 2022.
For context, the Social Security cost of living increase in 2022 was 5.9% — meaning that the federal government essentially gave a 5.9% raise to Social Security beneficiaries.
Pay down debt
Whenever possible, it’s wise to pay down debt — particularly high-interest debt. This is especially true of variable rate debt like credit cards because credit card interest rates often rise during periods of inflation.
As the benchmark interest rates increase, the cost for banks to borrow money also increases. Banks pass this cost along to customers, in the form of higher credit card APRs.
If you have credit card debt, check out Tally†. Tally is an app that may help qualifying Americans consolidate their credit card balances to a lower-interest line of credit. Learn more about how Tally works.
Inflation will likely affect all of our finances, but it’s nothing to panic about. By making some adjustments to our finances, we can be better prepared. And as the government and Federal Reserve take steps to tame inflation, hopefully, price increases will settle down in the coming months.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.