What is Inflation and How to Deal With It

We’ve been hearing the word “inflation” a lot recently as if it’s a new phenomenon. It’s not. Inflation is just another word for rising prices, which are actually a regular occurrence. In fact, prices have been steadily rising an average of 3.1% per year since 1913.

However, prices rise faster than 3.1% when products and services become scarce. The lack of major goods, like cars and homes, is why we’ve seen prices suddenly rise in the last year.

Pandemic-related supply chain issues, for example, made it a struggle to find hand sanitizer, toilet paper, and ibuprofen for more than a year, and prices rose accordingly. More recently, the war in Ukraine had an impact on the supply of gasoline, which affected the price you paid for fuel.

While you can't control inflation, what you can do is make different decisions about how you manage your money so that you hold onto more of it, even as costs increase.

The opposite of inflation is deflation, which is when prices across the economy fall. Although you might that would be preferred to inflation, the problem with prices that start falling is that consumers have a tendency to then hold off buying in the hopes of getting a bargain. When too many people stop buying, the economy slows down, companies start layoffs, and the situation can grow from bad to worse quickly.

The solution to inflation is to get smarter about what you’re doing with your money.

What Inflation Means for Your Wallet

What happens when prices rise is that your money now effectively buys less. Where filling your car with gas used to cost $40 just a year ago, you might get little more than half a tank with that same amount today. Filling it may cost $75. That means you have to find that additional $35 somewhere else in your budget.

This scenario is true with just about everything right now, from groceries to cars to computers.

To cope, many people are turning to credit cards to buy what they want now, whatever the cost. Mastercard reported that consumer spending was up 9.5% over the last year, especially in categories like jewelry, vacations, and eating out. Although prices are up, spending seems to be outpacing it.

While using your credit card is certainly an option, it will also increase the amount of debt you have to pay off later. If you can avoid it, you will end up saving money long-term.

You do have several other options to manage your money during times of rising inflation, besides charging it and worrying about it later.

How to Afford What You Need

When money is tighter, there are three things you can do to ease the discomfort: Cut back, spend less, or earn more. You can opt to try one approach or all three at once.

Trim spending

Cutting back on spending is one way to cover the cost of your must-haves, like food, shelter, and transportation. Ways to reclaim some of your money are:

Canceling subscriptions like streaming services you don’t use regularly
Putting your housecleaner or gym membership on pause
Eating out less often, including lunches at work
Converting from disposable products to reusable, such as napkins and paper towels
Adjusting your thermostat to reduce your utility bill
Batching errands to reduce the number of car trips
Relying on public transportation more often

Look for discounts

Another option is to try to pay less for what you normally buy. Some ways to shrink your bills include:

Switching to generic or store brand products, which are often just as good as name brand
Checking our prescription programs for medication discounts
Signing up for store loyalty and rewards programs to qualify for lower prices
Calling to ask for a lower interest rate on a credit card
Buying used whenever possible on everything from cars to furniture to clothes

Boost your earnings

You can look for ways to increase your current income rather than trying to dial back what you spend. You might try:

Asking your boss for a raise, especially if you haven’t had one in a while
Looking for a part-time job you could pick up around your full-time employment
Starting a side hustle to earn money based on a hobby or skill
Selling furniture, toys, clothes, and appliances you longer use
Paying down debt to free up more of your paycheck

Inflation is a constant in our lives, but when prices suddenly shoot up, having to pay more for what we need can be anxiety-producing. Taking steps to hold onto what you have and exploring how to make more can go a long way toward reducing the impact of inflation on your bank account.

Download our free Financial First Aid eGuide! It'll walk you through the best ways to manage your money during uncertain times. We’ll show you how to take inventory and review all your expenses, assess your debts, prioritize bills and communicate with creditors, and so much more!