Inflation Insights and Work-Arounds

A work-around (a.k.a., hack) is a strategy designed to circumvent an “issue” (problem) or challenge. It does not solve the problem or make it go away, but it makes life more manageable and allows people to get things done.

 

Right now, inflation is an issue of concern to many people. Inflation puts upward pressure on prices and makes them rise, leading to a reduction of the purchasing power of a dollar. According to the U.S. Bureau of Labor Statistics, the U.S. inflation rate for 12 months ending in February 2022 was 7.9%, the largest 12-month increase since January 1982.

What to do until inflation subsides? Below are 10 inflation-fighting work-arounds:

Review Your Budget- Track current income and expenses to clearly see the impact of inflation. For example, how much more you are paying for gas, utilities, and food than you did a year ago? Once you have a number, see if you can “find” it via increased income and/or reduced expenses. In other words, try to “claw back” the amount inflation has taken away.

 

Substitute to Save: Non-Food Items- Consider purchases of clothing, furniture, housewares, electronics, and more at thrift shops, garage sales, and online sales platforms such as Facebook Marketplace, Etsy, Craigslist, Nextdoor, and eBay. Not only will prices likely be lower than new items, but purchases will be available now without any supply chain delays.

 

Substitute to Save: Food Eaten at Home- Consider eating less of items that have risen sharply in price (e.g., beef, pork, poultry, eggs, and cereal) and more items with modest price increases, consistent with dietary guidance from your doctor. Another option is to consider store brands of inflated items (if they are less costly) or to stock up on items during sales.

 

Substitute to Save: Food Eaten at Restaurants- Try to “claw back” the higher cost of entrees that restaurants are now charging in response to higher costs for raw ingredients and labor (cooks and servers). One easy way to do this is to order water, instead of alcohol or a soft drink, and skip the dessert. Some restaurants also reduce prices if you pay with cash.

 

Time-Shift to Save- Try using energy for “elective” tasks at less expensive “off-peak” hours. For example, many utility companies have “time of day” meters and price structures that reward consumers for doing laundry or dishes at night and on weekends. Ditto for doing anything at less crowded (and expensive) times such as traveling by air or attending events.

 

Change Habits- Consider one or more of these money-saving strategies: turn the thermostat down a degree or two, consolidate errands to reduce gas consumption, turn off lights when they are not being used, shut down electronics with a power strip, do full loads of laundry and dishes, wash clothes in warm water, air dry dishes, and take shorter showers.

 

Review Your Portfolio: Try to earn the minimum rate of return (MRR) needed to stay ahead of taxes and inflation as an average savings/investment return. The MRR formula is inflation % rate ÷ 100 minus marginal tax bracket. For example, with a 6% inflation rate in the 22% marginal tax bracket, the MRR is 7.7% (6 ÷ .78). Some investors seek out inflation-indexed investments such as Series I savings bonds and inflation-indexed bonds and bond mutual funds. The best way to achieve positive, long-term, real (after inflation) returns is to build a diversified portfolio with different types of securities.

 

Review Your Debt- Expect that interest rates will typically rise to “cool down” inflation resulting from high consumer demand. Therefore, existing variable rate debt (e.g., mortgages, credit cards) will likely cost more (i.e., higher monthly payments). Strategies to address this concern include refinancing to a fixed-rate loan and accelerating debt repayment.

 

Postpone Purchases- Try not to purchase items impacted the most by pandemic-related inflation, at least right now. For example, new vehicles affected by the chip shortage and used vehicles affected by the shortage of new vehicles. Wait for prices to settle down if you can. Ditto for home improvements with highly inflated lumber, materials, and labor costs.

 

Reframe the Positives- Not everything about inflation is “gloom and doom.” Consider these three positives: 1. Inflation erodes the value of existing debt (i.e., loans are paid back with money that is worth less), 2. Inflation underlies cost-of-living adjustments (COLAs) such the 5.9% increase in Social Security benefits in 2022, and 3. Not everyone is impacted by inflation in the same way. For example, older adults typically spend less than others on gas and new/used cars.

This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.