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“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” — Ronald Reagan
From 2008 to 2020, U.S. inflation ranged from -0.4% in 2009 to 3.8% in 2008. After the 2020 pandemic and related supply-chain disruptions, inflation surged to about 8.0% in 2022. It eased to roughly 4.1% in 2023 and about 3.25% in the first half of 2024, but consumers are still feeling the pinch as prices rise and purchasing power falls. For perspective, something that cost $100 in 1980 would cost about $381 in mid-2024.
What causes inflation?
Economists describe inflation as too much money chasing too few goods and services. When money supply grows faster than the economy’s capacity to produce goods and services, each dollar buys less. Recent inflation was driven in part by pandemic-related production slowdowns and transportation bottlenecks that created shortages while demand remained steady.
How inflation is measured
The Consumer Price Index (CPI) is the most commonly used measure of inflation. It tracks average prices for a basket of everyday items—food, clothing, shelter, fuels, transportation, medical care, education, and recreation. Price data are collected each month from many locations across the country: thousands of housing units and tens of thousands of retail and service outlets. Some CPI measures exclude volatile items like food and energy; others include them. The version that includes food and energy is often more representative of real household expenses.
Your personal inflation rate
Inflation is personal. If you don’t drive, fuel prices matter less. If you live in a warm climate, heating bills are smaller. A single person who eats little will feel food inflation differently than a family of six. Published inflation rates are useful guides, but your own spending mix determines how much inflation affects you. Unanticipated inflation happens when the things you buy most rise faster than your income.
Practical steps to prepare and protect yourself
– Stock up on nonperishables when prices are low: toilet paper, canned goods, rice, beans, peanut butter and other long-lasting items. Buying on sale and storing basics can hedge against future price jumps.
– Buy household linens and electronics during end-of-season or holiday sales when discounts are deepest.
– Travel cheaper by setting fare alerts, choosing off-season dates, staying where meals can be cooked, or visiting less popular destinations. Consider driving to nearby spots to avoid high airfares.
– Borrow responsibly: if rates are expected to fall, an adjustable-rate mortgage might be worth considering so you can refinance later—but avoid extending the loan length needlessly. A 15-year mortgage usually saves a lot in interest. Never carry high-interest credit card debt; it undermines wealth-building.
– Use government inflation-protected securities: Treasury Inflation-Protected Securities (TIPS) and Series I Savings Bonds adjust with inflation and help preserve purchasing power.
– Consider CD ladders during rising-rate periods: staggered maturities let you reinvest at higher yields as rates climb.
– Long-term investing matters: over decades, stocks and bonds have historically averaged higher returns. Companies that can raise prices without losing customers—often in resource, energy, or essential-service sectors—tend to hold up well in inflationary times. Diversify across asset classes.
– Precious metals and commodities can act as stores of value, though they don’t produce income. Many investors hold a small allocation to such assets for diversification.
– Real estate often rises with inflation. Options include direct rental properties, real estate investment trusts (REITs), or crowdfunding platforms. Real estate can provide income and capital appreciation, but it requires management and due diligence.
– Social Security timing: delaying benefits increases your monthly payment. Waiting until age 70 generally gives the largest lifelong benefit, and Social Security payments are adjusted for inflation.
Everyday money-saving habits
– Switch to lower-cost brands or simple meal choices when possible.
– Buy in bulk for items you use frequently.
– Ask for raises when warranted—labor market conditions sometimes favor employees.
– Adjust spending habits to fit current prices; high inflation episodes are usually temporary and ease over time.
Key takeaways
Start planning early and factor inflation into both spending and investing decisions. Stock up on staples when prices are low, use inflation-protected government securities, diversify investments (including real estate when appropriate), and avoid high-interest debt. These steps can help preserve purchasing power and position your finances for a changing price environment.
