Prices are skyrocketing: here’s how to reduce the impact

Jhe price of almost everything, including groceries and heating your home, has gone up since last year. The inflation rate hit a 30-year high in October, according to consumer price index data released Wednesday by the U.S. Bureau of Labor Statistics.

The Consumer Price Index jumped 6.2% in the 12 months to October, marking the biggest 12-month increase since December 1990.

In October, prices rose 0.9% from the previous month, an even larger increase than the 0.4% rise recorded in September. Here are some of the top movers this month, by category (note that October percentages are seasonally adjusted, while 12-month figures are not seasonally adjusted):

  • Grocery prices rose 1% (up 5.4% over the past 12 months).
  • Heating oil increased by 12.3% (+59.1% over the last 12 months).
  • Gasoline prices rose 6.1% (up 49.6% over the past 12 months).
  • New car prices rose 1.4% (up 9.8% over the past 12 months).
  • Used car prices rose 2.5% (up 26.4% over the past 12 months).

Consumers saw inflation making headlines. Earlier this month, snack maker Mondelez – the company behind brands including Honey Maid, Oreo and Ritz – said it was considering start 2022 with a 7% price increase in the United States to take into account the rising costs of factors such as raw materials, packaging and transport.

Keep in mind the larger context

While a 7% increase in Oreo prices or a 60% year-over-year increase in the cost of fuel oil to keep your home warm this winter might sound alarm bells, here’s a reason to panic less: although prices have largely increased from 2020 to 2021, some prices have actually declined year over year in the same months of 2019 to 2020.

For example, while gasoline prices have risen 49.6% over the past 12 months, they have fallen 18% over the same 12 month period from 2019 to 2020. Fuel oil prices, which rose 59.1% this year, fell 28.2% from 2019 to 2020.

In short, given the lower 2020 numbers, the 2021 numbers look much higher. And while that doesn’t mean inflation isn’t happening, it does mean it might not be as bad as it looks when looking at the 2021 numbers in isolation.

Why inflation matters

Inflation means that your purchasing power has decreased, so you will need more money to buy the same goods and services now than before. While it’s not a big deal if your wages are rising in line with – or outpacing – inflation, it’s especially problematic for those living on fixed incomes or trying to figure out how much they need to save for retirement.

And this year, most people’s wages have not increased. After adjusting for inflation, seasonally adjusted, average hourly earnings actually fell 1.2% over the past year (and 0.5% from September to October 2021), according to the BLS Real Earnings Summary, also released on Wednesday.

Additionally, some areas – including food and vehicles – have seen significant increases in 2020 and 2021. Grocery prices, which have risen 5.4% over the past 12 months, have also increased 4% from 2019 to 2020. Used car prices were up 11.5% from October. 2019 to one year later, and increased by 26.4% from 2020 to 2021.

What you can do against rising prices

From finding ways to optimize your budget when shopping to changing the way you manage your money, there are steps you can take to protect yourself from inflation.

Understand the effect of inflation on your money over time

Money that you won’t need to access for the next three to five years may be better in an investment account than a savings account. the best savings account interest rates are around 0.50% (and many are well below that). Meanwhile, many investments can pay more than that over a long-term horizon.

However, keep your emergency fund in an easily accessible account. A good guideline is to save three to six months of living expenses to cover situations such as job loss, home repairs, or medical expenses.

Be creative about what you buy (and where)

When evaluating your budget, you may not necessarily need to cut back on purchases, but change the way you acquire them. Rather than buying new, look for sites that promote used goods, such as Craigslist, Facebook Marketplace, Mercari, and Letgo. Local “Buy Nothing” groups, which proliferate widely on Facebook, might even bring you gently used furniture, baby items, clothes, and other household items for free.

Consider replacing brand names with store brands, which are usually less expensive. And you might even find that the savings associated with warehouse clubs are worth the cost of membership.

Reevaluate your budget

As COVID-19 safety rules continue to change and many offices and schools reopen, you might see your budget change again. Maybe you’ll trade meals at home for sandwiches on the go, or buy some new clothes to account for the fact that you can no longer work in sweatpants from the couch. You can also plan vacation trips or large family reunions after taking a break last year.

Many experts recommend the popular Budget 50/30/20, where you spend about 50% of your after-tax money on necessities, 30% on wants, and at least 20% on savings and debt repayment. Reevaluate whether your expenses fit this framework, especially since costs are likely to change in the coming months (if they haven’t already).

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