Inflation Shrinks Buying Power

Traditionally, inflation is a silent headwind – we haven’t paid much attention to it, nor has it impacted our daily lives. However, given that we are writing history with today’s inflation and interest rates, this article is an attempt to explain inflation, its impacts on everyday consumers, and some practical suggestions for balancing cash flow in times of inflation.  

What is inflation?

Inflation is a decline of purchasing power over time of a particular currency. It is important to keep in mind that inflation is a healthy sign for a growing economy. The Federal Open Market Committee, the arm of the U.S. central bank that makes decisions about managing the nation’s money supply, targets a 2% rate of inflation over time.  However, our current inflation rate for June of 2022 was 9.1% which is the highest it has been since 1981 and is about 5 times higher than the FOMC’s target of 2%. This rise inflation has been frightening for US citizens as the cost of goods has risen. For perspectives sake, the inflation Rate in the United States has averaged 3.27% percent from 1914 until 2022. This can be an alarming statistic, but this is not the first time in history that inflation has spiked. US inflation peaked in the late 70’s to early 80’s where it rose to 13% in 1979. The chart below illustrates inflation over time:

How am I effected?

As we understand inflation, it is important to recognize how it effects the buyer. Inflation causes goods and services to cost more. For example, in 1980 a movie ticket cost on average $2.89. By 2019, the average price of a movie ticket had risen to $9.16.  The effect on the economy is increased when the rate of inflation spikes. The recent spike has caused the US consumer to feel the impact of inflation greatly. The recent surge in inflation has been driven, at least in part, by a combination of supply chain issues, pent-up consumer demand, and economic stimulus from the pandemic. There is no way to confidently predict when inflation will decrease, but history shows that inflation with go back down.

How do consumers help handle the strain that inflation causes on our buying power?

When goods and services cost more, proper cashflow management becomes a critical piece of the financial puzzle. The best way to manage cash flow is to track how much money is coming into and out of a household or business through an expense worksheet (An expense worksheet is linked below for your convenience). In this expense worksheet, subtract expenses from monthly income this will result in the monthly discretionary income. That discretionary income is the wiggle room available to use on lifestyle expenses. Knowing the amount of wiggle room in a budget during times of inflation allows for better financial decision making and gives power back to the consumer.

What are practical ways to balance cashflow in times of inflation?

The reality is that during times of inflation, the average household’s cashflow is harder to manage. This is when it is time to start thinking of ways to make more money or reduce expenses in order to balance cashflow. Here are some practical ways to balance cashflow:

1. Make more money – one way to do this is by picking up an additional shift. Another option is to create an additional income stream through side jobs.  

2. Reduce expenses – there are many ways to do this. One easy way is to cancel recurring subscriptions that are not in use. Audit monthly subscriptions and cancel those that are not necessary. This is a small but very effective way to help reduce expenses.

3. Pay down high interest debt – By paying down high interest debt, such as credit card debt, you are able to reduce the amount of interest paid on the debt which will in turn reduce your premium payments.

Inflation is something on the mind of most Americans at this point in time, and it important for people to understand what inflation is, how it affects the consumer, and ways to alleviate some of the strain inflation has caused on the average household’s cash flow.

To learn more about inflation, follow this link to listen to the LongView Living podcast on the topic.

These are the views of LongView Planning Partners and not those of MML Investors Services, LLC or its affiliated companies, and should not be construed as investment advice. Neither the named Representative nor MML Investors Services, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, MML Investors Services, LLC makes no representation as to its completeness or accuracy. The author is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

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