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What is Inflation and How Can You Get Ahead of Rising Costs?

Written by:
Financial Literacy Specialist

It’s tough to keep up with costs when they continue to rise at exponential rates. Living paycheck-to-paycheck is stressful enough, but as prices increase it’s just not sustainable. That’s what happens when inflation rises at the record levels that we’ve seen this year. If it’s squeezing your budget, then it may be time to adjust your financial strategy.

A simple definition of inflation

Image of a bag of groceries being spilled by a spiking arrow to indicate the effects of inflation

To counteract something effectively, you need to understand it first. So, what is inflation exactly?

Inflation occurs when prices rise on most goods and services. It’s a large-scale increase across the board. You don’t just see one or two costs in your budget get more expensive. Instead, everything gets more expensive at once.

While it’s a fact of life that costs generally rise over time, a period of inflation leads to rapid increases that most people just can’t afford.

During an inflationary period like the one we’re in now, the purchasing power you have declines. Each dollar you earn buys less stuff. It takes more money to purchase the same everyday goods.

For example, consider gas prices. They rose from an average of $3.07 in May 2021 to $4.54 by May 2022.[1] That’s a 38% increase. So, while it only took $30 to fill up a 10-gallon tank in 2021, it takes over $45 to fill it up now.

How do we measure inflation?

Inflation measures an increase in prices over time. How much those prices increase is known as the rate of inflation. It gets calculated by looking at the Consumer Price Index (CPI).[2] The U.S. Bureau of Labor Statistics (BLS) monitors prices that consumers pay for everything we buy and logs them over time in the CPI. Inflation measures the rate of increase in prices. If prices fall over time, then it’s known as deflation.

This chart shows the increases and decreases in prices over the past 20 years on five key items that most Americans buy:

Line graph showing the average price data for bread, ground chuck, milk, and gasoline between April 2002 and April 2022.

As you can see, all those lines are going up over the past two years and they’re all at record highs.

How bad is inflation right now?

The annual adjusted inflation rate in the U.S. slowed from a 41-year high of 8.5% in March 2022 to 8.3% in April 2022.[3] So, the good news is that it’s dropping. The bad news is that it will need to drop much more steeply before people start getting relief.

Although there is always some inflation—prices generally rise over time—the inflation we see now is cause for concern. People are having a The current rate of inflation is concerning because prices of goods and services have increased at a rapid rate. Going back to the chart above, even the price of a loaf of bread—which is largely stable—has jumped from $1.19 to $1.61. That’s an increase of nearly 50 cents on an item that usually doesn’t change.

Then you have things like gas and meat and milk that have seen more dramatic changes. The problem is that it all adds up and unless you have more income this year, you probably can’t afford all these increases. If you can’t get a raise at work or are living on a fixed income in retirement, it’s a huge problem.

Ways to combat inflation

If you are feeling added pressure from inflation, you are not alone. Thankfully, there are a few ways you can combat it. Here are a few things you can do to get ahead of rising costs.

Budgeting during inflation

It’s always smart to audit your budget periodically. Goals and spending habits change over time. However, during periods of inflation, you need to be proactive and adjust your budget accordingly.

  1. Start by checking your budgeting app or worksheet to see where you stand. Check the current cost of things like gas and groceries versus the actual costs paid over the past three months.
  2. If you spend more than you earn now, then it’s time to make some tough choices and figure out what you need to cut.
  3. Keep in mind that you should not budget down to the last dollar. You need breathing room. This includes saving 5-10% of your income AND having free cash flow. That’s money not allocated for saving or spending that you can use to cover unexpected expenses and ongoing price increases.

In normal circumstances, you only need to check your budget every few months once it’s set and balanced. However, during an inflationary period like this one, it needs more attention. Check it every month.

A budgeting app can make this easier. Check with your bank or credit union first. They usually offer money management software that’s built into your accounts. That makes it easy to set spending limits and then get notified about overspending in real-time. Use these alerts to your advantage.

Pay down credit card debt

Using credit cards to cover increasing costs is the opposite of what you should do during inflationary periods. Instead, you need to focus on paying off credit card debt.

Each balance paid will eliminate one bill, freeing up more money to cover those rising costs. But if your budget is already tight, a normal debt reduction plan won’t help. You simply don’t have the extra cash to make larger payments on your debts.

The good news is that there are ways to lower your total payments while you get out of debt. These solutions offer budget breathing room now and build more breathing room over time.

These Options May be Able to Help

You can negotiate directly with creditors to pay off your balances. They may lower your interest rate, allowing you to pay off debt faster even with the same monthly payment. They may even lower your payments, although this usually means they will freeze your account so you can’t make new charges.

A debt consolidation loan is a personal loan you use to pay off your credit cards. It works because loans have much lower interest rates. In some cases, depending on the loan term you choose and how much you owe, you can lower your payments, too.

However, recent rate hikes mean it’s getting harder to consolidate this way. If you can’t get an interest rate that’s significantly lower than your credit cards, this won’t benefit you.

A debt management program (DMP) is a repayment plan designed for high interest rate credit card debt. A DMP reduces or eliminates interest and can reduce your total payments by 50%. The biggest advantage is that you can get lower rates even with bad credit.

Connect with a certified credit counselor to craft the best plan to pay off credit card debt.

Increase your income

The last way to fight inflation is the most obvious, but it’s not necessarily the easiest. You need to increase your income.  

If you’re employed, it’s time to talk to your boss for a raise. Get prepared by noting all the responsibilities you’ve taken on and achievements you’ve had since your last pay increase. If you get paid hourly wages, you can also ask for more hours or to work overtime.

You can also pick up a side gig or pick up more side gigs that you already work. If you own a home, consider renting out an extra room.

Do whatever you can to increase how much you earn each month so you can offset cost increases. Still, if you’re like many people, increasing your income as much as you need may be difficult. People living on a fixed Social Security income may not have the means of increasing their income.

Thus, it’s often best to budget around what you have and get a plan to pay down your debt first. Then, if you can increase your income, it will make those first two goals even easier. If you’re having trouble balancing everything in your budget, we can help. You can call (844) 276-1544 to get a free debt and budget analysis from a certified credit counselor. We can help you work through all these options and develop the best plan to get ahead of rising costs.


[1] U.S. Energy Information Administration – U.S. All Grades All Formulations Retail Gasoline Prices (Dollars per Gallon)

[2] U.S. Bureau of Labor Statistics – CPI

[3] U.S. Bureau of Labor Statistics – Consumer prices up 8.5 percent for year ended March 2022

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