Why Is Everything So Expensive Right Now?

Even if you’re not usually the type to count every penny when you go to the grocery store, it’s become almost impossible not to notice prices creeping up over the last year. The increase in food prices alone is a hard pill to swallow — but combined with rising gas prices, energy prices and the costs of just about everything else, there’s one question on everyone’s mind: Why is everything so expensive right now?

We’ll examine the factors driving inflation, what to expect next and what you can do to protect your finances.

What is inflation?

It might seem like inflation is best left to economists, but the Federal Reserve has a simple enough definition: “Inflation is the increase in the prices of goods and services over time.”

For example, if a loaf of bread and a gallon of milk cost $7 to purchase one year and $10 to purchase the next, inflation may have occurred. The $7 you had initially buys you less in the second year than it did in the first.

However, we’re not just talking about price increases for a few items. Instead, inflation applies to rising prices across the entire economy.

How much have prices increased in 2022?

The U.S. Bureau of Labor Statistics measures inflation using the Consumer Price Index (CPI), which takes a representative “basket” of items the average person needs to purchase (such as groceries and rent) and tracks how much that basket costs over time. Recently, the answer has been “a lot.” The CPI rose 8.2% between September 2021 and September 2022. 

This figure was particularly driven by energy (which increased 19.8% over the same period) and food, which increased by 11.2%.

For the record, it’s not just Americans facing this problem; price increases are happening around the world.

Do we have inflation every year?

To some extent, inflation is inevitable as long as the economy continues to grow. As the world’s population rises and people become wealthier, demand for more “stuff” increases, which results in higher prices. It’s simple supply and demand.

However, when times are tough and demand wanes, we’re more likely to see deflation, which is the opposite of inflation (a decrease in prices). But all in all, prices trend upward over time.

If you look at historical figures of the annual inflation rate in the U.S., you’ll see there has been inflation in most years over the last century (with some deflationary years thrown in). This is why we hear stories about our grandparents buying houses for less than $10,000 in the 1950s.

However, 2022 inflation is now at its highest level since the early 1980s. Since 2010, inflation has generally been between 1% and 3% each year, which is significantly below the 8% rise over the past year.

Why is everything so expensive right now?

We’ve already mentioned that higher prices are due to inflation. But what’s causing the inflation? While higher prices are often the result of the natural forces of supply, demand and economic growth, that isn’t the full story.

Situational or time-limited factors — such as the COVID-19 recession, geopolitical tensions and ongoing supply chain challenges — can also impact inflation.

Let’s look at them in further detail.

Rising energy prices

The recent conflict between Russia and Ukraine has wreaked havoc on energy prices. Most countries (including the U.S.) have stopped buying gas from Russia or reduced their consumption, making alternative sources more expensive.

As a result, the costs of buying gas for our cars and energy for our homes have risen. But the situation goes beyond this. Most industries rely on energy for production and fuel for logistics, meaning that everything from your morning coffee to a new phone becomes more expensive. 

Post-pandemic impact

Even before the Russia-Ukraine conflict arose, other problems were bubbling that have contributed to inflation.

Some of these include:

• Global integrated circuit chip shortage, which affects numerous industries and leads to shortages of cars and electronics

• Gas and lumber shortages driven by supply chain delays and global cyber attacks

• Pent-up demand for vacation travel and luxury goods that consumers couldn’t access during lockdowns or due to COVID-related job uncertainty

• Excess corporate buying as companies stock up on materials they struggled to access during pandemic lockdowns

• Higher labor costs as companies struggle with worker shortages, higher health care costs and increased labor requirements associated with COVID cleaning protocols

• Ongoing shipping delays and higher shipping costs associated with importing and exporting goods

Will prices go down in 2023?

If there’s any question more important than why everything is so expensive right now, it’s when and if prices will decrease. So, what can we expect from next year and beyond? 

The factors outlined above aren’t expected to be permanent, but it’s unclear exactly how long they’ll last.

On the bright side, inflation isn’t rising at the same level as before. The CPI might have increased a lot over the past year, but there’s been a notable decline over the last few months. From October 2021 to June 2022, the one-month percent change in the CPI has been above 0.5% (with the exception of April 2022), and some months, it was even above 1%. 

Meanwhile, figures have been below 0.5% in July, August and September 2022. This suggests we may be past the peak.

However, most experts believe it will take two years for inflation to really calm down. 

How to keep in your finances in order during inflation

With the future so uncertain, everyone wants to know what to expect from future prices. Yet even if we had a crystal ball, there’s nothing you can do to bring inflation down. Instead, it’s best to focus on how to look after your finances by trimming your budget, increasing your income if possible and paying off credit card debt.

1. Trim your budget

It’s now more important than ever to trim your budget of unnecessary expenses. Track all your spending for a few months and look at what you can cut out. Many people don’t realize how big of an impact a few random subscriptions or frequent takeout can have.

Also, try to be more diligent about shopping when there are sales, looking for discounts and taking advantage of cashback apps.

2. Increase your income if possible

In addition to cutting costs, consider increasing your income if possible. Rising prices should go hand-in-hand with wage increases (eventually). Although your grandparents may have bought a house for under $10,000 in 1955, they were earning a lot less than you are today. 

Wage growth in the U.S. was 8.22% between September 2021 and September 2022, so if your income has remained the same since the pandemic, now may be the time to ask for a raise or apply for a better-paying job. You might also consider starting a side hustle to supplement your income.

3. Pay off credit card debt

Another thing to consider is rising interest rates. The U.S. Federal Reserve, or the Fed, influences inflation by controlling the federal funds rate. When inflation is high, it increases the funds rate, which in turn means higher interest rates. That’s good news for your savings account, but bad news for your credit cards or if you want to take out a new loan.

This means that paying off credit card debt should be a priority right now. Doing so can also help you free up cash you can use to offset the higher costs of your other purchases.

Keep your head above water

If you’re wondering why everything is so expensive right now, you’re not alone. The causes come down to a complex mix of the post-pandemic fallout and global tensions, and it’s unclear when exactly the tide will turn. 

It can be scary to live in a time when the cost of living is rising and you don’t know what’s around the corner, but one of the best things you can do is turn your focus to what you can control, like paying down your credit card debt.

For help, consider the Tally† credit card repayment app. It takes your higher-interest credit card debt and converts it into one lower-interest line of credit so your debt becomes easier to manage.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.