Understanding How Inflation Impacts Your Budget & Financial Plan

Inflation tends to be blamed for everything from high grocery prices to rising gasoline costs, but what is inflation, and how does it affect your day-to-day life?

Inflation is the gradual loss of purchasing power that is reflected in a rise in the prices of goods and services over time. This can be caused by increases in a country’s money supply or a bottleneck/reduced supply of key goods. To combat this, the central bank takes steps to manage the money supply and credit to keep inflation within reasonable limits.

Securityplus Federal Credit Union is here to help you get a better understanding of inflation so that you can take the steps necessary to make sure you are prepared financially.

Why is there inflation?

U.S. inflation has erupted to record levels after four decades of mostly moderation. The latest spike was triggered by the global economic slowdown during the COVID-19 pandemic, which spawned trillions of dollars in U.S. government financial relief to citizens and supply-chain disruptions, only to be exacerbated by the war between Russia and Ukraine.

Not much escapes inflation’s clutches. Spiraling costs to fill your tank, feed your family and keep a roof overhead lead a long list of consumer products and services, including mortgages, auto loans, and credit cards, negatively impacted by inflation.

It’s important to understand that a certain level of inflation is baked into all global economies. In the U.S., the pre-pandemic target had been a 2 percent rate of annual inflation. That’s important because businesses rely on their ability to raise prices sufficiently to pay workers and other expenses, and still profit.

Inflation’s worst trait is its erosion of purchasing power for households and businesses. People living on Social Security, pensions or other fixed incomes tend to be most vulnerable during periods of high inflation. Even your favorite bag of potato chips, whose price is unchanged but contains fewer chips – known as “shrinkflation’’ – is more subtle evidence of price inflation.

Not everyone experiences inflation the same

While inflation news is usually seen as bad, for some, it offers good news. Home sellers in most regions of America have benefited from buyers’ offering full or close to full asking prices despite a parallel rise in interest rates. What’s more, borrowers whose loan rates are fixed benefit from repaying those obligations with dollars whose present value has been eroded by inflation.

In a slowing economy, those who have job tenure or more secure positions often benefit from inflation, but people who are in less-demand positions or startups are more at risk for layoffs and budget cuts. Retirees can also be affected by inflation since the purchasing power of their social security benefits is decreased, which means they will have to absorb price increases with minimal cost-of-living adjustments.

Ways to navigate inflation’s rough waters

A basic understanding of inflation and its impact on your daily life can help you manage your savings, debt, credit lines, and household and business expenses. That will enable you to adjust things temporarily so you can continue to live and plan for key financial milestones. 

• Curb expenses: Now is a good time to review all your fixed monthly expenses: subscriptions for your cellphone, cable TV, internet video streaming and other online services, newspapers and magazines; electric, water/sewer, and heating oil, among others. If you’re able to price-shop those services, consider doing so. Also, services you infrequently use should be the first you trim or cut loose. Securityplus FCU’s household budget calculator could help you discover ways to save more money.

• Scour for savings: Try cutting your grocery bill using coupons or taking advantage of weekly sales on foods and other items you regularly buy. If your food market also sells gasoline, take advantage of promotions that tie fuel discounts to how much you spend on groceries. Our rewards credit cards may give you cash back for spending on these types of items.

Homeowners should consider refinancing their mortgages into either a lower rate, a shorter payback term, or both. A mortgage refi* or a home equity loan* both allow you to tap your home’s equity to pay down debt or to spruce it up and ready it for sale. Check out our mortgage-refinance calculator to see what you could save.

And don’t forget to swap that high-interest credit card for one bearing a more favorable rate. Many lenders offer cards featuring cashback rewards and other perks – discounts and incentives that can help stretch your inflationary dollars. View our loan and credit card interest rate-comparison tables to see how much you could trim your credit-card costs.

• Boost “rainy day’’ savings: This may sound counterintuitive, but paying yourself first makes sense, particularly during inflationary cycles. If you don’t already have one, an emergency savings account could help cushion against unexpected personal, household, or business financial calamities. If you’re nearing retirement, consider stepping up contributions to your Individual Retirement Account or workplace-sponsored 401(K) retirement-savings plan. In doing so, your pre-tax contributions exploit one of the best wealth-building assets available to investors, no matter the rate of inflation: Interest compounding.

In addition, certain commodities, such as gold, silver and industrial metals, often serve as inflation hedges because their values tend to rise during steep inflationary cycles. But investing in commodities isn’t for the fainthearted or those without extra funds to invest or investment experience. Consider speaking with a licensed financial advisor before investing in commodities or bonds.

• Invest with an eye on safety: Federally insured savings certificates, up to $250,000 per individual depositor by the NCUA, provide a safe way to grow your savings. With guidance from Securityplus FCU’s financial advisors, you also might explore investing in government or tax-free municipal bonds, whose relatively low yields are offset by the knowledge that they are backed by the full faith and credit of their issuers.

While inflation’s jaws will certainly bite into most household and business budgets, you’re prepared to take steps to avoid getting caught in its grip.

At Securityplus FCU, we are here for you in good times and bad, and happy to help you navigate these uncertain economic times when you need us. Feel free to contact us or visit one of our convenient branch locations in Maryland.

This article contains information that should not be taken as investment advice.

*Subject to credit approval. Terms and conditions apply.