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What is Inflation, and Will It Affect Your Holiday Spending Plan?

Written by:
Director of Education and Corporate Communications
Christmas tree knocked by inflation

As we get back to work after the pandemic, demand for goods and services is up, but supply is down. This has led to a high rate of inflation that we haven’t seen since the 90s. Just about everything will cost more this holiday shopping season, and you may have to make difficult choices. If you’re not sure what inflation is, this article will give you a little insight and offer some tips on how to stay on budget this holiday season.

A simple definition of inflation

Inflation happens when prices rise on most goods and services, sometimes very quickly. When it occurs, the purchasing power you have declines. It takes more money to purchase the goods that you buy every day.

For example, look at gas prices, which rose from an average of $2.69 in November 2019 to $3.49 in November 2021.[1] That’s nearly a 30% increase. In other words, if you spent $20 to fill up your tank last year, this year, the cost is around $26!

And it’s not just gas that has increased. “Inflationary periods” refer to a rapid increase in prices on most goods and services. So all the costs in your budget rise at once. Housing costs, cars, food, and almost everything else have become more expensive.

How bad is inflation right now?

Overall, the annual adjusted inflation rate in October was 6.2%, which is the highest it’s been since November 1990.[2] So, prices haven’t risen this quickly in over 30 years.

Although there is always some inflation—prices generally rise over time—the inflation we see now is cause for concern. People are having a hard time maintaining a budget, and it’s especially challenging for those that still haven’t recovered to their normal income because of the pandemic.

Why has the inflation rate increased so dramatically this year?

This year, we had the “perfect storm” for inflation pressure. There’s been a decreased supply at the same time as increased demand for most products. So, there isn’t just one reason for increased inflation; there are several:

  1. Supply chain issues – Factory shutdowns and slowdowns during the pandemic mean less products were produced. Now shipping ports are backed up as factories try to make up for those losses. Problems with the supply chain mean that the quantity of just about everything we want is limited. When supply is limited, the prices go up.
  2. Computer chip issues – Many products use some type of computing chip. But because of a global computer chip shortage, production isn’t fast enough to meet consumer demand.
  3. Energy production – During the pandemic, energy prices fell dramatically as people stayed at home. Refineries and oil production were taken offline. Because of reduced production in the U.S. and OPEC nations as well as increased demand, oil prices have gone up. That affects fuel costs, as well as the cost of goods because manufacturing costs have risen as well.
  4. Worker shortages – The “great resignation” of 2021 means that many companies are understaffed and forced to raise wages to attract new workers. That translates to higher prices.
  5. Money supply increase – Money supply refers to the total amount of money in circulation. from 2015-2020, the money supply had an average annual growth rate of 3-7%. However, since the pandemic, it has gone up to about 22-31%.[3] This rapid increase can devalue the dollar.

When will inflation end, according to economists?

Economists believe that inflation will likely last into 2022, and some believe it could be longer. However, as supply chain issues get resolved, energy prices stabilize, and workers find their new jobs, we should see inflation easing. This would mean prices would start to drop, although they are unlikely to drop to their previous levels.

The Federal Reserve may also begin to raise interest rates, which is a common solution to combat inflation. Of course, this means that lenders and credit card companies would raise the rates they offer consumers as well. So, easing inflation would give your budget some relief, but then the cost of credit would increase.

What does inflation mean for you and your holiday budget?

Prices are up everywhere, which means nearly every part of your holiday budget may be affected.

You can expect prices to be higher, sales to be fewer, and products sold out sooner for this holiday season.

Gary Herman, President of consolidated credit

The holidays mean gift-giving

What would the holiday season be without gifts being given? This year, unfortunately, gifts will be more expensive and less available. Shipping costs and supply disruptions result in price increases, some of which are in the double digits.

  • Try to find sales before you buy.
  • See if you can give older models of toys or electronics which might be discounted.
  • If you shop online, try to purchase multiple items to take advantage of free shipping or become a member of that shopping site.

The holidays also mean travel and entertainment

  • So far, the price for a plane ticket hasn’t gone up yet. But jet fuel hasn’t been this pricy since 2014, so the price of your ticket may go up. You might want to get tickets sooner rather than later.
  • If you’re driving for the holidays, expect to pay a lot more for gas.
  • Either way, try to stay with your relatives. Hotel prices have risen beyond the inflation rate.
  • If you’re planning to host a gathering at your home for the holidays, that will also cost more. Food costs have increased for everything except fresh fruit. Beef and poultry have gone up the most. If you have a guest staying with you, you may want to ask them to chip in for food. Also, talk to family or friends about making holiday meals potluck.

What to do in the face of rising prices

You’ll need to do a lot more planning and budget this year if you want to avoid holiday debt. Look online to find the best deals, even if you plan on shopping in a physical store. Use coupon codes, rebates, and price drop alerts as much as possible to keep costs as low as possible. When driving, try to combine trips to save on fuel usage. Before you buy something, ask yourself if the purchase is within your budget and if it’s needed.

Budget carefully for the holidays

You need to implement tight controls, keep your discipline, and shop for the very best deals as early as you can. Set a holiday spending plan and don’t deviate from it. Try not to get the most in-demand items, which will cost more. You can use our free, spending planner to help with your holiday budget.

Find ways as a family to cut back and share costs

As a family, you should be discussing your weekly or monthly budget and have everyone agree on what is truly important. Many people focus on the next shiny object that comes along, but that is a disaster for your budget.

Your family can get together to discuss what is truly necessary. Check over unnecessary steaming and other memberships; if no one in the family has used the services in more than a month, cancel the subscription. As a parent, lead by example and cut down on luxuries.

For holiday gifts, agree as a family to a spending limit. For adults in your family, consider doing a gift exchange so each person is only buying for one adult.

Keep credit card debt minimized to avoid extra bills

Tis’ never the season for irresponsible charging. Remember that you borrow money every time you use your credit card, typically at very high rates if you don’t pay the full balance off by the due date. Make sure that whatever you spend, you can pay it off on the due date to avoid that high interest.

Ideally, you want to have a cash-only holiday shopping season. If you use credit to earn rewards on purchases, you should be able to pay them off immediately with money in your budget. Otherwise, steer clear.

Talk to a credit counselor for help with your budget

If you face challenges balancing your budget and are unsure how you will pay your bills this holiday season, you can talk to a certified credit counselor. At no cost to you, a certified credit counselor can help you plan your budget and help you explore options for paying off the debts you have.

Request a free debt and budget evaluation from a certified credit counselor.

Sources:

[1] https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=emm_epm0_pte_nus_dpg&f=m

[2] https://tradingeconomics.com/united-states/inflation-cpi

[3] https://www.reuters.com/business/economists-eye-surging-money-supply-inflation-fears-mount-2021-06-17/