Higher Inflation Won’t Break You


Inflation is never a welfare story.

Nothing does good for items to get more expensive, no matter how inconsequential price increases have been for decades leading up to 2022.

Gasoline prices have long been the main determinant of whether consumers are confident and happy or nervous and unhappy.

Elections revolve around inflation numbers. “It’s the economy, silly,” was mostly about voters who felt a loss in purchasing power.

With inflation now at its highest level in 40 years, nothing you can say is going to make people feel good.

So I’m just gonna try to make you feel better. A little bit better.

Judging by the way people are grumbling and complaining – US consumer sentiment fell more than expected in March, hitting levels last seen in the 2008 financial crisis – it’s a mission. doomed to fail.

I’m not going to insult anyone’s intelligence and say, “It’s not that bad,” because what you see at the gas pump or what you experience at the grocery store checkout is emotional. and personal. What you drive – economical or the proverbial gas guzzler – doesn’t change the truism that no one likes to pay more at the pump.

It doesn’t matter how much you drive. I fill up my tank maybe 20 times a year so pump prices don’t hurt much, just every time I stop to fill up.

Additionally, a recurring Bankrate.com survey has long shown that only 4 in 10 Americans have enough savings to cover an unexpected $1,000 expense; increasing day-to-day costs, planned spending, even a little, pushes more people to the brink of real trouble.

Rising costs make saving and investing more difficult; a Seattle-area reader recently asked if it makes sense to reduce her 401(k) reserves, making an extra 1% of her income available to cover higher day-to-day expenses.

She can hardly be alone.

Higher prices trigger a phenomenon economists call the “substitution effect,” which involves changing choices in response to higher prices. Indeed, this is where consumers replace expensive products with cheaper alternatives – think of how you might buy more chicken when beef prices rise, for example – and although people don’t struggle with these tweaks, they’re not big fans.

We are human; we are creatures of habit, loving what we love and resisting change.

Worse still, from a country and economic perspective, is that alternative choices are more difficult for low-income people, who can least afford to get rid of the old gas-guzzling car, or buy in bulk, or follow many of the money-saving strategies normally thrown around by experts to deal with higher prices. When you’re already saving a lot, any cut feels like touching a bone.

Any changes we make due to current conditions feel imposed on us rather than by choice. People looking to save more might cut down on their coffee intake, look for a more fuel-efficient car, or cancel a subscription to a movie site or channel to save and put their money to better use, but they make these choices deliberately. Even when, for example, the price of a subscription service increases, it is a quick “stay or go” decision.

Inflation, on the other hand, hits everything, feels inevitable, and seems to impact every choice at once.

I know you’re still waiting for the part where I try to make you feel better.

Here’s what most people really need to remember:

Higher inflation is not going to break you.

Yes, groceries are more expensive, but the US Bureau of Labor Statistics said the average annual cost of groceries for US households was nearly $5,000 in 2020. That’s about $420 per month, which, after inflation, pushes $450, which means the increase is about $360 per year.

Average gas prices, according to AAA, have risen about a dollar a gallon over the past six months. The most popular vehicle in America is the Ford F-150, which gets 24 miles per gallon of gasoline; for an owner of the pickup truck that drives the US average of 13,500 miles per year – according to the US Department of Transportation’s Federal Highway Administration – that means about 560 gallons of gas.

Thus, gas price inflation is costing this driver approximately $560 per year.

On average, however, Americans are spending less of their spare cash on energy expenditures than in the past. Many people think back to the days of gas rationing and energy inflation in the 1970s and 1980s; it was a time when almost 10% of Americans’ personal consumption expenditure went to gasoline. Today, gas and energy expenditures are near their lowest levels, representing around 4% of personal consumption.

Obviously, your mileage — on gas, groceries, and all expense fronts — may vary, but the basic truth for a majority of Americans is that we can afford the price hikes and adjustments.

We don’t like it, but we can handle it.

It might trigger our anxious natures, but it will take more than higher prices for a few years to knock most people off their lifetime financial goals.

Yes, personal finance experts have long told you the importance of saving small amounts of money and letting it grow over time, and if inflation of groceries and gas takes 1,000 $ of your savings now, it robs you of the opportunity to grow that money. over the decades.

But this concept hasn’t stopped most people from having a lot of unnecessary or frivolous expenses in their lives. Suze Orman said a daily dose of coffee to go was “like peeing $1 million down the drain”.

That said, coffee drinkers who fall short of their lifetime financial goals shouldn’t blame the coffee.

Similarly, US consumers should not blame current inflation for derailing their long-term plans. While your lifetime financial goals could crumble in a year or two of higher prices, inflation isn’t the real problem, it’s spending and saving habits.

I told you it wouldn’t make you feel better.


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