Earlier today, the U.S. Bureau of Labor Statistics released the latest Consumer Price Index (CPI) figure, which is what is used as the national headline inflation rate. The inflation rate for May was 8.6%, higher than the expected 8.3% and an increase in the inflation rate when a decrease was actually expected after the Fed has begun raising interest rates.
The Headline Inflation May Not Be Your Inflation
The inflation rate in the headlines might not reflect the actual inflation rate you you’re experiencing. The national headline inflation rate is calculated each month using an average basket of goods and services. This is called the Consumer Price Index, or CPI. Although the CPI is a useful gauge of how much prices have gone up on average across the country, it is less useful to describe the impact inflation has had on any one individual or household.
When thinking about and discussing inflation, there is some debate and criticism that the basket of goods and services used to calculate CPI has changed over the years, and even that it has been adjusted to purposefully show a lower inflation rate than what the actual national inflation rate really is. To demonstrate this, there is a blockchain-driven service called Truflation that has been created in an attempt to show a more realistic inflation rate. You can access the Truflation dashboard here.
There is also the Producer Price Index (PPI), which many believe to be a better guide for where inflation is going because it reflects the change in prices that producers (i.e. manufacturers) see, which occurs before increased prices hit consumers.
When comparing the 3 inflation rates, CPI for May is 8.6%, PPI reported in May for April was 11% (the PPI for May won’t be released until next week), and Truflation is currently reporting 10.75% for inflation.
Reduce the Impact of Inflation
Whether the CPI, the PPI, or the Truflation inflation rate is more accurate, it's likely that none of them is an accurate inflation rate for you. Also, an important thing to consider about inflation is that even as inflation drops down toward the target 2% it will take time to reach that target. Even more importantly, just because inflation could eventually return to the target of 2%, that doesn't mean that prices will go back to where they once were. That is possible, and would be called deflation, but deflation is not that common. Certainly, some prices should come back down, such as gas and energy prices which are significantly affected by the Russia-Ukraine war and the sanctions placed on Russia, but there's no way to know when that would happen and how far prices will come back down. Until then, we all still need to contend with continued rising prices at a higher rate than what we've been used to. Fortunately, there are a few things you can do to help reduce the impact that inflation has on your finances.
Calculate Your Personal Inflation Rate
To begin to know how inflation is actually affecting your finances you would need to calculate your personal inflation rate. To do this you look at your expenses for the same month last year and then look at the same expenses this year. The difference in price divided by the expense amount last year times 100 is your inflation rate. For example, if you spent $3.50 per gallon for gas in June 2021, and are spending $6.00 per gallon in June 2022, the inflation rate on gas is [($6.00 – $3.50) ÷ $3.50] x 100 = 0.7143 x 100 = 71.43%. That is the inflation rate on gas in this example.
As you can imagine, if gas is a large part of your monthly expenses, your inflation rate could potentially be much higher than the 8.6% national headline inflation rate. You would need to continue this process with the rest of your expenses to calculate your total inflation rate. Take all your relevant expenses from last year and add them up. Then take the same expenses from this year and add those up. Then divide the difference in those expenses by the total of the expenses from last year. Multiply by 100. That is your personal inflation rate.
Look for Ways to Reduce Expenses
If inflation is making it difficult for you to pay bills, pay for extra things you want, or save as much as you want to, it's a good time to look at your expenses. Are there expenses that you no longer need to make? This could be a matter of reducing the amount of entertainment you pay for, going out to eat less, or putting off planned unnecessary expenses until a later date.
If you have any debt that has an adjustable interest rate those should be looked at closely. Typically, when inflation is high, interest rates will be increased as a way to bring down inflation. That is what we're seeing happening with the current interest rate increases by the Fed. Any debt that has an adjustable interest rate will see its interest go up as a result. That can create higher payments for credit cards and adjustable rate loans. Refinancing that debt at a lower non-adjustable interest rate can help reduce monthly expenses. Paying off debt can also reduce monthly expenses and create savings from future interest payments.
For recurring expenses, such as cable, internet, and mobile phone services you can call the providers to see if you qualify for any promotions that would lower your bill. You may even end up with improving your service at a lower price. If you shop at stores you can look for discounted gift cards that could lower your expenses at those stores. Frequently, there are gift cards available from 5% to even 25% off, depending on the store and the offer.
There are many other ways to reduce expenses, so this is an area where you can do some exploration, brainstorming, and research.
Increase Your Income
There are ways to increase the income that you bring in each month. This could be as simple as asking your employer for a raise. It could also be a bigger change, such as looking for a new job that offers higher pay and even a promotion. Or perhaps starting a side-gig or part-time job in addition to your primary job. Or if you're a couple with only one spouse working, maybe the other spouse could look for work. It could also be a good time to look at your investments to see if they can be reallocated to investments that produce income or at least are more likely to perform as a hedge against higher inflation.
Free Guide for Dealing with High Inflation
Those are just some of the main things that can be done to help reduce the impact of inflation on your finances and your financial plan. Escient Financial is providing a guide to help you look at more specific ideas that could help reduce inflation's impact. The guide is available as a free download to all Escient Financial Insights Newsletter subscribers. To get yours, simply provide your name, email address, and phone number below and you'll receive a link immediately to download the guide.
