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Prices are high -

The prices of basic goods have been high for a while now. You're not alone if you've walked out of the grocery store a bit confused about the price you paid versus how light your bags are!

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What is inflation? -

The Federal Reserve pays close attention to core PCE (personal consumption expenditure) inflation, which measures changes in consumer spending on typical goods and services.

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What is inflation? -

Inflation is a change in the levels of prices, over a period of time. The Federal Reserve’s preferred measure for the price level is the PCE price index, as published by the BEA (Bureau for Economic Analysis).

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Volatile external factors -

This inflation excludes the contribution of food and energy prices. These are seen as very volatile and mostly determined by external factors.

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Volatile external factors -

However, recent experience and some research have cast doubt on how appropriate it is to exclude food from this measure of inflation.

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Peak inflation -

From mid-2021 and all throughout 2022, inflation peaked and, with it, the price of goods soared. Many blamed the aftereffects of the pandemic and the war in Ukraine for rising prices.

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Consumer price index -

Inflation went down in October 2023 year-over-year from a rate of 3.7% to 3.2%, according to the consumer price index (CPI) report released in November 2023.

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Consumer price index -

The CPI is a basket of goods and services that consumers typically buy. The contents in the basket are fixed, so changes only reflect the differences in prices over time.

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Higher prices are staying -

As of November 2023, the rate of inflation may be reducing overall, but the price of goods continues to remain high. It doesn't seem like that's going to change anytime soon.

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Higher prices are staying -

While the rate that these prices are increasing has slowed, they're not declining. In most cases, prices won't go back to what they were before 2021.

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Inflation target -

The Federal Reserve's inflation target is 2% over the long term. It's not expected for inflation to reach that level again until 2026.

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Interest rate increases -

As interest rates have been increased to offset the effect of inflation, it also means buying a house or car, or paying your credit card bill, has become more expensive.

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Food insecurity -

Weather can also drive up food prices, and extreme weather conditions are becoming more common. Heat waves destroy crops, threatening to drive up food prices.

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Food insecurity -

Prolonged droughts and regional conflicts can have global effects, as was seen with the war in Ukraine. Climate change is increasing the chances of swings in food prices in the future.

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The El Niño effect -

The El Niño weather pattern tends to raise temperatures and bring more extreme weather conditions. It means that over the next few years goods including sugar, cocoa, coffee, and grains are at risk of higher prices if supplies reduce.

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Some prices have begun to stabilize -

The prices of some goods have already stabilized, e.g. eggs, in comparison to the highs of 2022 and early 2023.

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Deflation -

Falling prices are not necessarily a good thing. "Deflation" can have a negative effect on the economy, causing higher unemployment if companies lay people off due to falling profits.

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Deflation -

Deflation is also negative for people with mortgages, because the fixed amount they have to pay back remains the same. If prices are falling, the mortgage becomes a bigger burden.

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Wage inflation -

Wage growth lagged behind inflation for many of the past few years. This meant although people may have gotten a raise at work, the speed of price increases meant they didn't notice a difference in their disposable income.

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Wage inflation -

In 2023, wages began to outpace inflation again. Many individuals, however, don't believe their wages will keep up with the rate of inflation.

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Do your research -

As higher inflation is not going away in the short to medium term, it's worth learning about the basics of it, so you can understand what it will mean for you.

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"Fiat money" inflation -

"Fiat money" is money that isn't redeemable against something of material value, like gold. Fiat inflation erodes a currency's purchasing power. It does this by putting more money into circulation than is needed for basic growth.

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"Fiat money" inflation -

Fiat inflation is achieved by bank lending or central bank actions, with the logic being more money = more buying = more economic growth. However, prices soon rise under this model.

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The problem -

The problem with fiat money inflation is that not everyone gets the income boost that's needed to financially cope amid rising prices.

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How to cope: revisit your "rainy day" fund -

Have a look at your spending and the groceries you buy, and adjust to reflect the changes in prices. Reprioritize where your money is going and cut back where you can, to add to your rainy day fund.

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How to cope: work on your savings goals -

Continue putting as much as you possibly can into your savings each month. This could mean cutting back on non-essential items when prices are higher. Saving is a habit: it's easier to do it if you don't stop. Keep working towards your goals.

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How to cope: think local for vacations -

Day-trip destinations in your area, visits to local beaches or lakes, national parks, natural landmarks, or amusement parks are alternatives to spending on a bigger holiday. Enjoy time with friends and family without having to worry on your return.

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How to cope: reassess your financial goals -

Continually reassess your financial goals according to the inflationary climate. You may need to push back on some things, but don't be disheartened. You are still working towards your goals, albeit at a temporarily slower pace.

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How to cope: offset prices with cash back and rewards cards -

Cash back and rewards cards can help you save on every purchase that you make. Some providers let you earn cashback on debit purchases.

Sources: (Vox) (CNBC) (Forbes) (Barron's) (Affinity Federal Credit Union)

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