U.S. inflation is not a fun topic but it is important to know the ugly details so you can see how it impacts your savings. “On-the-ground” facts are sometimes more helpful than broad economic stats that are so enormous that they boggle the mind.
In this post, we will look at those facts along with tactics to beat back the scourge of U.S. inflation on our personal finances. Then we will learn how to prepare long-term for how inflation can affect our investments and retirement plans.
Inflation Definition
So what is this nefarious thing called inflation? It is when the cost of living gradually rises over time, reflecting the overall level of inflation in the economy and decreasing the amount of purchasing power that your money has.
U.S. inflation basically “plucks” dollars from your bank account by making each dollar less valuable. And makes you have to work longer and harder to be able to buy things that you must have such as:
● Milk
● Bread
● Gasoline
● Electricity etc.
FYI - The Bureau of Labor Statistics stated that milk went up about 50 cents between 2020 and 2021. Boneless chicken rose by over a dollar a pound! That’ll ruffle your feathers and bust a budget.
But even an increase like that is not that noticeable if you’re not tracking your finances like a hawk. Meaning, inflation is yet another good reason to use a budget and go over your expenses on a regular basis. We can’t stop grocery shopping. But with budget tracking, we may be able to make different choices in where we shop and what we put in the grocery cart.
U.S. Inflation at the Pump
Same goes for gasoline. We can adjust our activities to save on fuel:
● Car-pooling
● Keeping proper air pressure in the tires
● Pre-planning errands for each week
And yes, some people are disciplined enough to take advantage of cashback or points on credit cards to reduce these inflated prices. But it’s wise to avoid that temptation if you’re not super organized or confident you will pay the balance off each month. You could end up paying interest on top of $5 per gallon!
U.S. Wages vs. U.S. Inflation
Even increased wages have a hard time overcoming inflation. According to data from the Bureau of Labor Statistics, wages rose from $29.61 an hour in November 2020 to $30.85 an hour in September 2021 – a 4.18% increase. Inflation was determined to be higher though - 5.3 percent.
Earn more, spend even more. Not a good recipe for increasing your savings account or planning a nice retirement party, right? On top of that, inflation stats are complex, confusing, and convoluted. That 5.3% stat is from the government and many other number gurus don’t think their formula tells the entire story. In fact, many say Uncle Sam tells lots of stories about inflation and always has.
Real-world Impact of Inflation
What do all those percentages mean to the average family just trying to eat well, keep the kids in shoes, and save for a rainy day? According to one economist, it means we are spending about $175 more on food each month than we did last year. And we can’t blame It on Door Dash’s gaggle of questionable fees! Basic grocery shopping and home supplies are now pretty costly.
Check these price hikes out from Dollar Stores since 2020:
● Dove Body Wash up 75 cents
● Folgers Coffee up about a buck
● 12-pack Pepsi up nearly $3
● Pop-Tarts - never mind, please avoid Pop-Tarts
Again, unless you keep an eye on your budget, you may never know how much your trips to Kroger and Dollar General are costing you. If you pay an extra $175 a month on groceries for 5 years, how much could you have made off of that inflated cost of $10,500 if you had been able to invest it?
Based on a 5% return per year - you’d have a total of $13,104.58. Having that amount added to your nest egg is better than spending it on inflated eggs and cereal, don’t you think? So, what can we do about necessities like food so our future doesn’t get robbed by inflation? Glad you asked…
Small and Big Budget Moves
In addition to monitoring your weekly expenses, you can consider alternative ways to lower costs. Minor adjustments would be buying in bulk and price comparisons. Major adjustments would be considering the long-term and choosing a city with a much lower cost of living.
Not even the city of Coupon, Pennsylvania, a real city, is immune to inflation. But if the cost of living there was already much lower than another city, then the savings remain. I found a pretty cool comparison site that lets you compare various cities to see what it costs for necessities. I plugged in Atlanta, GA versus Des Moines, Iowa and here’s what I found:
● Consumer prices including rent in Des Moines are 19.45% lower than in Atlanta
● Rent prices in Des Moines are 38.18% lower than Atlanta
● Groceries in Des Moines are 8.38% lower than Atlanta
In other words, it’s cheaper to live in Des Moines than Atlanta, generally speaking. And you’re unlikely to pull your hair out due to traffic nightmares. You don’t have to move across the country to save on the cost of living though. I checked on Austin, TX versus El Paso, TX also:
● Rent prices in El Paso are 59.60% lower than in Austin
● Grocery prices in El Paso are 17.98% lower than Austin’s
Fighting and Fleeing U.S. Inflation
Some of you don’t mind pulling up stakes if you can save big money over a few decades. So those of you considering moving overseas someday - here are some tidbits that might interest you to flee inflation.
● Restaurant prices in the are 70.11% lower than in the United States
● Groceries prices in the Philippines are 45.56% lower than the U.S.
● In Belize, consumer prices (including rent) in Belize are 42.51% lower than here in the U.S.
I’m not encouraging you to abandon your town, state, or even your country. But I believe if we think outside the box it helps us be more flexible and creative in fending off U.S. inflation. No question, inflation is a problem. But not unsolvable. Plus, we have no choice but to deal with it before it erodes our savings if we take no action whatsoever.
Looking up at 62 years old and wondering where a big chunk of our savings went is not a fun thought. Especially knowing strategic moves that ease the effects of inflation are available.
Businesses Pass on Inflation
What about services being affected by inflation? It’s a widespread problem since most of us hire out many services that our parents once did themselves:
● Vehicle oil changes
● Landscaping
● House cleaning
Businesses such as landscaping companies and quick lube shops get affected by inflation. They buy gas, equipment, and have to raise employee wages too. If you own a business, you already know this painful truth. And the increased costs don’t get sent to Congress for some complex analysis. They simply get passed on to the customer.
It isn’t just those basic services that cost more either. Dental services were 101.65% higher in 2021 versus 2000 (a $101.65 difference in value). And I’m pretty sure none of our parents handled their own root canals. Not even the thriftiest among them!
Highest U.S. Price Increase
Lastly, we can’t ignore inflated college costs, which have gone up 1,400 percent since 1977! Other sources show college costs have gone up 25% just in the last decade. For perspective - if the median U.S. salary had increased 1,400 percent since the late 70s, households would be earning $189,980 per year instead of $67,521 per year.
That discrepancy hammers home what inflation does to a family. To battle the outrageous rising costs of college we have to put ourselves in position to earn more so we can save more. While also being tactical and organized in our efforts to reduce expenses. Many of us plan on paying for all or part of our children's college costs. So the earlier we begin saving and investing to cover those costs the better chance we have of being of serious help to them.
And I believe educating our children about these costs is wise. They should know what they’re getting into with expensive schools so they can hone in on a career that provides both a great income and meaningful work.
Here are 3 ways to help pay for college:
● 529 savings plans
● Many employers will pay off student loans or pay for schooling depending on the industry.
● Big-time sports scholarships are a long-shot, but some niche sports are worth researching.
U.S. Inflation and Retirement Planning
What does all this spell for your future and your retirement plans? No - not D-O-O-M. Inflation is just one more factor that must be included in your financial planning. It’s volatile, confusing, and sneaky but as long as you take it into consideration, you can reduce inflation’s impact on your savings.
The goal is to save enough for a future that includes inflated prices. Not a future based on a fantasy that bread will still be $3 in 2035. Or that gas will be under $5 a gallon. Who knows? That is what retirement planning is all about. Planning as best you can with the information you have on hand. And using historical data to predict what the cost of living will be in 5 years, 10, and so on.
The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.