Inflation impacts everyone’s lives, especially when it comes to the cost of living. Inflation is an increase in prices over a period of time and an associated decrease in purchasing power. However, the cost of living refers to basic expenses such as food, housing, and transportation. If the costs of everything go up (inflation), then the cost of common goods and services will also increase (the cost of living). Please keep reading to learn about the breakdown of the cost of living, how inflation impacts it, and tips on how to save money during inflation.[1]
Food
One of the first areas you might notice inflation is in the cost of groceries. The cause of food inflation could be several things, including:
- Supply chain issues: During and following the pandemic, farmers experienced interruptions in the supply chain, making it hard to get the necessary supplies to generate crops efficiently.
- Labor shortages: Fewer truck drivers and employees make it more difficult for operators to provide the same service at the same price that was possible before the pandemic.
- Extreme weather: Natural disasters can damage crops and limit the overall supply.[2]
Impact of inflation on housing
One main factor in the price of homes is mortgage interest rates, which are directly correlated with inflation. During inflation, borrowing money from the bank to purchase a home is more expensive.
Here’s why: During inflation, interest rates tend increase. When interest rates are higher, mortgages are more expensive, which can weaken demand for homes, and therefore decrease home prices.
However, when interest rates decrease, mortgages are less expensive, which can increase demand for homes, and home prices tend to rise with the increased demand.[3] In large cities with a small amount of land available relative to the large population, the effects of inflation may be stronger.[4]
Also, inflation also increases the prices of labor, materials, and machinery. This makes building a new home or renovating an existing home more expensive.[5]
In summary, inflation can make a home loan more expensive due to the higher mortgage interest rates. But the upfront price on that home may be lower as demand for homes decreases because of the higher long-term costs of that loan.
Impact of inflation on Insurance
When inflation is high, insurance premiums can rise for the customer due to insurance companies experiencing higher claims payouts. Think about inflation’s impact on cars, housing, and all the components used to build or fix both. If all of those items are more expensive, it’s going to show up in the cost to replace those items. Therefore, insurance premiums increase as those replacement costs increase.
Impact of inflation on Health care
Inflation impacts consumers’ out-of-pocket costs and health insurance premiums due to the increase in the related labor and supply expenses.
Nearly 28% of consumers in the U.S. feel less prepared to handle unexpected healthcare costs today than in the past year. And delays of preventive and routine health care can lead to minor health issues becoming major. This can eventually force people into higher-cost settings, such as emergency rooms. [6]
Impact of inflation on Taxes
When inflation is high, there are certain adjustments that the IRS can make to increase the value of federal tax credits and deductions. These adjustments might not make a big difference in your tax refund, but it’s important to know which ones are adjusted for inflation. [7]
Impact of inflation on Education
To deal with rising inflation, many schools will increase the cost of attendance without increasing their grant budgets. This means students may need a larger loan to cover the higher cost of education.
Student loan interest rates are also rising due to inflation. But if your student loan interest rate was locked in before inflation took hold, you could be paying significantly less for your education than people borrowing during inflation.[8]
Impact of inflation on Transportation
Rising inflation directly impacts transportation costs, fuel prices, equipment costs and shipping rates. Inflation can also affect equipment and labor costs.
As wages increase due to the inflation increase, logistics providers need to pay more to retain qualified drivers, clerks and carriers.[9]
Impact of inflation on Utilities
Like everything else, a rise in inflation generally means a rise in utilities costs. The cost of electricity in your home or business increases with the costs of labor, materials, maintenance, monitoring capabilities, etc. needed to provide that utility. [10]
Tips to save money during inflation
During inflation, an immediate reflex for many people is to cut costs. Here are a few ideas on how to control expenses:
- Create a budget and stick to it.
- Pay off high-interest debts.
- Create a list before you go grocery shopping.
- Prepare meals at home instead of eating out.
- Use coupons when grocery shopping.
- Look at your monthly bills and determine where you can cut back. [11]
Inflation has the power to impact the cost of living in many ways, such as housing, groceries, education, and more. In order to make your money go further during inflation, it’s important to budget properly and consider the tips we discussed.
Sources:
[1] “How Does Inflation Affect the Cost of Living?” Jennifer Reiszel, hrccu.org/blog/how-does-inflation-affect-the-cost-of-living (Sept. 26, 2022).
[2] “How Inflation Is Affecting The Food Industry,” restaurantware.com/blog/post/how-inflation-is-affecting-the-food-industry (July 19, 2022).
[3] “How Does Inflation Impact Real Estate Investors and Landlords?” Madison McCracken, baymgmtgroup.com/blog/inflation-impact-real-estate (June 28, 2022).
[4] “Is There a Correlation Between Inflation and Home Prices?” Joseph Nguyen, investopedia.com/ask/answers/correlation-inflation-houses.asp (May 31, 2022).
[5] “How Does Inflation Affect Real Estate? Here’s What You Need to Know.” Baruch Mann, entrepreneur.com/money-finance/how-does-inflation-affect-real-estate-heres-what-you-need/433953 (Dec. 2, 2022).
[6] “Inflation signals unrest ahead for health care,” Asif Dhar, Dr. Jay Bhatt, Leslie Korenda and Wendy Gerhardt, deloitte.com/xe/en/insights/industry/health-care/health-care-affordability-inflation.html (Nov. 1, 2022).
[7] “How Inflation Can Impact Your Taxes,” Kelley R. Taylor, kiplinger.com/taxes/604977/inflation-and-taxes (Jan. 2, 2023).
[8] “How Inflation Affects College Students,” Shadi Bushra, onlineu.com/magazine/how-inflation-affects-college-students (July 20, 2022).
[9] “How Inflation Is Affecting The Logistics Industry,” EIN Presswire, khon2.com/business/press-releases/ein-presswire/626506253/how-inflation-is-affecting-the-logistics-industry (April 6, 2023).
[10] “Why Is My Electric Bill So High?” Geoff Williams, money.usnews.com/money/personal-finance/family-finance/articles/why-is-my-electric-bill-so-high (March 25, 2022).
[11] “Ease the Inflation Squeeze: How to Combat Inflation in 2023,” Timothy Moore, thepennyhoarder.com/save-money/how-to-combat-inflation (June 23, 2023).
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