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Inflation and Your Costs of Living

We have seen worse inflationary times, but that’s no solace when you’re struggling to fill the fridge or gas tank, or to pay for other necessities.

To compound matters, there’s no consensus regarding what’s caused prices to go up. Is it an offshoot of the lingering pandemic, or are other forces in play? In other words, because we don’t know how we got here, we’re unsure how long this period will last.

But beyond the headlines, what does inflation mean to you and your daily life? That’s a good question. To that end, here’s what you should know about inflation and your costs of living.

What is Inflation?

Essentially, inflation is an overall increase in the prices of goods and services. It corresponds with a decrease in the purchasing power of money. For the 12 months ending in July, the annual U.S. inflation rate was 8.5% — down slightly from 9.1%, which was the worst in 40 years.

The rate is often assessed by changes in the Consumer Price Index (CPI), which averages the price of a basket of goods and services from areas nationally. Results are reported as a percentage increase or decrease in the CPI.

What Does Cost of Living Mean?

Basically, it’s the cost of maintaining a certain standard of living. Cost of living can also be described as the amount of money needed to cover basic expenditures – housing, food, healthcare, taxes, etc. – in a certain place and during a certain period.

For instance, Social Security benefits went up 5.9% this year due to a cost-of-living adjustment. How that affects your costs of living hinges on how and where you live.

Who Does Inflation Hit the Hardest?

Nearly everyone feels a rising cost of living in their daily lives. But if you guessed that inflation wallops the middle class and lower-paid people worse, you’d be correct.

When you’re paying more for food, gas, and utilities, you have less money to save or to spend on things you “want,” as opposed to “need.” To counter the higher prices, many people spend less, buy substitutes, or search more for deals.

Inflation and Housing

It would make sense that as inflation goes up, real estate prices do, too. And indeed, that’s often how it goes, at least at the beginning of a marked inflationary spike. However, things aren’t as cut and dried.

To help offset inflationary effects, the Federal Open Market Committee frequently intervenes and raises the federal funds rate. This is the interest rate that’s charged to banks and other financial institutions that use the Federal Reserve Bank.

As the cost of home loans increase, lots of people are left out of the market. In turn, this leads to lukewarm home sales. Predictably, the longer homes are on the market, the more sellers tend to lower their asking price to lure buyers.

After all, there’s precedent. Recovery following the 2008-2009 U.S. financial crisis was helped by lower interest rates. The same thing happened during the height of the COVID-19 pandemic.

If you already owna home, one way to reduce stress caused by inflation is to use the equity you have in the house to free up cash. You can do that through what’s called a home equity loan. You can use the equity you’ve built up to lower your monthly payments and consolidate your debt, then have up to 30 years for repayment. If you’re interested, we recommend you check out Achieve home loans.

In summary, inflation and increases in your costs of living go hand in hand. If you’re a homeowner, in addition to curbing your spending and looking for bargains, you may want to seriously consider a home equity loan, which could restore your purchasing power and give you some much-needed breathing room.

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