The U.S. inflation rate rose to 5% between May 2020 and May 2021, the biggest jump since the 2008 Great Recession. Many people do not understand what this means, while others worry how rising inflation will affect the economy and, ultimately, their wallet.
Inflation is a complex topic, so we’ve put together this guide to help you understand the foundations of inflation and how to plan your finances accordingly.
What Is Inflation?
Inflation is the overall increase in the price of goods and services in an economy. As the cost of goods and services increases, purchasing power decreases. In other words, inflation reduces the value of the dollar, and as inflation rises, each dollar will buy you less.
During the 2020 lockdown, the prices of many goods and services were drastically cut. Concerts were cancelled, travel plans were delayed, restaurants closed and car-buying plummeted.
A year later, with vaccinations on the rise and lockdowns lifting, goods and services which were repressed for a year are now back in demand, however, supply is limited, causing the prices for these limited goods and services to go up.
How Will Inflation Affect the Economy?
Economists expect current price hikes to be short-lived as the economy adjusts to the post-pandemic world. Factories will begin to work at total capacity again, suppliers will modify their inventory and shortages will ultimately reduce.
How Will Inflation Affect You?
First, recognize that not all inflation is harmful. Prices rise every year and a healthy level of inflation benefits the economy by making U.S. debt easier to pay.
Some additional good news: 2021 has seen a labor market which is consistently raising wages and introducing sign-on bonuses as an incentive to get the public back to work. Purchasing power does not diminish as income increases.
What Can You Do to Prepare for Inflation?
One of the best things you can do to ensure your personal finances are in good shape, regardless of what happens to the inflation rate, is to have a financial safety net. We recommend establishing an emergency fund equal to at least six months of expenses. This gives you wiggle-room when there is an unexpected shift in expenses or income.
Additionally, attempt to lock-in the prices you pay for rent and other significant expenses for as long as possible. The eviction moratorium is set to expire soon and landlords may seek to increase rental rates as they adapt to higher home prices. Attempt to lock in a 2-3 year lease, or, if you’re looking to purchase a home, consider a fixed-rate 30-year mortgage. Time allows for the economy to adjust and balance out, and for you to build your savings.
During times of economic uncertainty, it is vital to remain calm and stay attentive to your finances. Travis Credit Union is here to help you succeed, whether through financial planning or saving. Schedule a personal, face-to-face appointment with a live TCU representative today.
Chat with Travis