How to Manage Your Finances with Inflation on the Rise

Over the past year, consumer prices have surged an astonishing 7% – the fastest pace in nearly four decades. Rising prices can be attributed to a thriving economy paired with ongoing supply chain snarls and 2021’s unexpected housing boom. Unfortunately, the sudden uptick has hit wallets hard, especially those in lower income brackets, despite growing wages.

To combat inflation, the Federal Reserve has signaled that it intends to hike interest rates for the first time in three years. The central bank also plans to begin shedding its stockpile of bonds soon (much to investors’ chagrin). But the exact timeline remains nebulous, as does the extent of the benefits to consumers’ wallets. 

What is inflation, and how do higher interest rates help tame it?

The usual definition of inflation is that it’s the erosion of purchasing power over time. As the prices of goods and services go up, a single dollar buys less than it did the year before. 

Some inflation is normal in a functioning economy, and arguably healthy in moderation. But high inflation, like we’ve seen this year, eats away at workers’ wages, erodes savers’ cash accounts, and reduces economic competitiveness. 

Typically, the Federal Reserve tries to limit annual inflation to about 2% by marginally manipulating interest rates. But when it soars suddenly, the Fed may pump interest rates higher or more often. 

But why does this work?

It all boils down to the inverse nature of inflation and interest, as well as the way that we use debt. When the Fed boosts short-term interest rates, consumers and businesses have to pay more to borrow money. At the same time, higher interest rates mean that consumers earn more on their savings, encouraging them to stash rather than spend their paychecks. 

As consumers cease spending their disposable incomes and businesses slow their borrowing, the economy cools down. Goods move less quickly, consumers are less likely to buy unneeded services, and the demand for goods goes down as a result. And when demand falls, prices fall, too (or at least stop rising), thereby halting inflation or leading to deflation.  

How Can Consumers Combat High Inflation in the Meantime?

At the moment, there’s no precise timeline on when the Fed will boost interest rates, or how often, or by how much. Fortunately, a few smart money moves can help you stave off the worst of these topsy-turvy times and position yourself for success down the road.  

Opt for Substitutions in Your Budget

Rising prices are a great reason to reevaluate your budget and decide what’s important to you. But it’s also a time to see where you can save on the goods and services you’re not willing to part with. 

Fortunately, there are plenty of ways to make substitutions in your budget that don’t compromise your quality of life:

  • At the grocery store: Buying designer or high-end products can sometimes have perks – but when it comes to your grocery bill, the difference in quality is often negligible. On average, you can save 15-30% when you choose store brand products. 
  • Around the house: You’d be surprised how much you can save on health and hygiene products, household cleaners, and even furniture by shopping at your local discount store instead of the big box retailers. Membership chains like Costco and Sam’s Club can also get you more bang for your buck if you like to buy in bulk. 
  • In your entertainment budget: Going out to eat or having a movie night with your bestie is fun. But so is popping a big bowl of popcorn and having pajama night in your own home or having a cook-off in your own kitchen. (Pro tip: you can also rotate your streaming subscriptions rather than cutting them all out. You still get to binge your favorite shows, and your wallet will thank you. That’s a win!)  

Add Inflation-Friendly Securities to Your Portfolio

Investors can take refuge from the worst of inflation with a few (relatively) inflation-friendly securities. Consider putting your money into:

  • Treasury Inflation-Protected Securities (TIPS): TIPS are government-issued securities whose prices fluctuate to keep pace with inflation. While the fixed interest rate remains the same for the life of the bond, the purchase price rises as inflation goes up. 
  • Stocks: Investing in stocks has long been heralded as a way to outpace inflation, as historical returns average around 10%. But note that some industries tend to fare better than others in inflationary environments, particularly groceries, energy, healthcare, and construction materials. 
  • Commodities: Inflation is a rise in prices across the economy, including in real estate and raw goods like precious metals, oil, and agriculture. If you want to not just combat inflation, but potentially profit from it, investing in these goods is one place to start.  

Refinance Your Existing Debts

While interest rates have fluctuated a bit recently, you still have time to nab a good rate before the Fed steps in. If you have any high interest or variable-rate debts like a mortgage, credit cards, or student loans, consider locking in a better rate now before rates skyrocket. You may also want to consolidate multiple loans or lines of credit into one fixed monthly payment. 

Lastly: Negotiate for a Raise

It’s no secret that the minimum wage hasn’t kept pace with inflation for some time now. But even workers in higher-paying jobs report that their wages haven’t kept pace with the record-high inflation of 2021, leading to depressed “real wages” and even effective pay cuts nationwide. 

But we’re still in the midst of an historic worker’s market, leaving many employees holding the cards. If you didn’t receive a sufficient pay raise in 2021, make 2022 the year of negotiating for what you’re worth. 

Alternatively, you can take advantage of the Great Resignation to find a new employer or make a lateral shift into a new career. Switching jobs, finding your passion, and taking time to work on you is in vogue – don’t let the movement pass you by. 


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