If inflation is crunching your budget? Here are 3 ways to fight back

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Inflation is quickly raising prices for households in core areas of their monthly budgets — energy, food and housing. That’s making it hard for consumers to avoid a financial hit, even as wages are also rising at their fastest clip in years.

But there are levers Americans can pull — relative to their jobs, investments and spending — that may help, according to financial advisors.

“I liken the situation to being out at sea in a tiny little boat in the midst of a horrible storm,” said Andy Baxley, a Chicago-based certified financial planner at The Planning Center. “You just have to control what you can control.

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“You can’t control the storm or ocean, but you can control what you’re doing on your little boat.”

The Consumer Price Index jumped 8.5% in March 2022 from a year earlier, the fastest 12-month increase since December 1981, the U.S. Department of Labor said Tuesday.

The index is a gauge of rising prices across a swath of U.S. goods and services. A basket of items that cost $100 a year ago would cost $108.50 today, on average.

Gasoline, shelter and food were the biggest contributors to rising costs last month, the Labor Department said.

Those categories have a big impact on the typical American: Housing, transportation and food accounted for almost two-thirds of the average household budget in 2020.

“Households are having to make very difficult [financial] decisions day in and day out,” Greg McBride, chief financial analyst at Bankrate, said of inflation.

Food, energy and housing

Specifically, “food at home” prices (i.e., grocery bills) are up 10% over the last 12 months, the biggest annual increase since March 1981. Costs were up across all major food categories, the Labor Department said.

Shelter costs such as rent, meanwhile, rose 5% in the past year, the fastest annual pace since May 1991.

And household energy costs such as electricity and natural gas rose 11.1% and 21.6%, respectively, in the last year. Meanwhile, prices at the pump are up 48%.

Power has shifted to employees in a major way. Take advantage of this rare moment to make sure you’re getting what you’re worth.

Andy Baxley

certified financial planner at The Planning Center

Russia’s invasion of Ukraine was a big contributor to inflation in March, especially for gasoline prices. (Gasoline accounted for more than half of overall inflation last month, though prices have fallen recently as oil prices have come down.)

Russia and Ukraine are also big agricultural exporters, and their conflict likely plays at least a small role in higher food prices, McBride said.

But inflation had been high even before the war in Europe, a function of demand outstripping supply since the U.S. economy ramped up in early 2021.

Initially, consumers had lots of money to spend and global supply chains couldn’t keep up.

That dynamic is still present, as Covid cases abroad cause lockdowns and halt production, for example. Labor supply also hasn’t yet fully recovered, and businesses have raised wages to compete for workers; they may pass those labor costs on to consumers via higher prices, for example.

Some economists are optimistic inflation peaked last month. So-called “core” inflation figures (which strip out the volatile food and energy categories) fell for the second consecutive month, perhaps an early sign of a broader deceleration.

“There seem to be clear signs of a slowdown there,” said Andrew Hunter, a senior U.S. economist at Capital Economics. “But it’s likely to remain high by past standards for the next year to 18 months because the economy is so strong.”

There are a few steps households can take to blunt inflation’s financial impact.

1. Ask for a raise — or switch jobs

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For one, high prices may be eclipsing some good news for workers: The job market is hot. Job openings are near record highs, layoffs are near historic lows, and employers are raising wages quickly.

Instead of focusing on how much more money is being spent due to inflation, workers can use their newfound leverage to make more money, Baxley said.

Workers should ask for a raise or hunt for a higher-paying job if their employer is unwilling to pay that raise, Baxley said. This is also a good time to negotiate work-related costs — for example, asking to work from home more often can reduce transportation time and, therefore, gasoline expenses.

Taking home thousands of extra dollars in a paycheck will likely have a much bigger impact on a consumer’s bottom line than other still useful actions such as buying generic brands instead of “premium” counterparts.

“Power has shifted to employees in a major way,” Baxley said. “Take advantage of this rare moment to make sure you’re getting what you’re worth.”

2. Save in a high-interest-rate ‘I bond’

Second, consumers saving for a purchase in the next two to three years (maybe a car or a down payment on a home) can buy “I bonds.”

These nearly risk-free investments pay a rate that rises and falls according to the Consumer Price Index and therefore protects the purchasing power of consumers’ savings, Baxley said. Investors can save up to $10,000 a year.

This should be a bucket separate from emergency savings, since I bonds lock up your money for at least a year, Baxley added.

3. Gauge your personal inflation rate

Lastly, consumers should examine how they’re spending money to gauge their personal inflation rate, Baxley said. (Online calculators can help determine this rate.)

The Consumer Price Index is a national average that may not reflect an individual’s situation such as their wage growth and household expenses. Households that use public transit may be insulated from high gas prices, just as vegetarians might also be from the higher relative cost of meat and poultry.

“Figure out how inflation is hurting your household the most,” Baxley said. “Then you can start to look for substitutes and replacements.”

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