Should You Change Your Spending Habits Due To Inflation?

When you fill your car’s gas tank or when shopping for groceries, you have probably noticed an increase in the prices for all types of goods and services that you have purchased. From November 2020 to November 2021, the Bureau of Labor Statistics reported a 6.8% increase in the Consumer Price Index (CPI), the highest year-over-year inflation in nearly 40 years old.

The CPI measures the weighted average of the prices of a basket of goods and services to consumers. In other words, it measures how far your money goes when purchasing services and items such as groceries, gasoline, utilities, health care, automobiles, etc.

While inflation remained low at the start of the pandemic, the recent price increase is the result of various demand and supply factors.

During the pandemic, many found themselves full of cash due to cutbacks in spending, due to Covid-19 restrictions and multiple stimulus checks. On the supply side, gas prices rose, there were shortages of key materials like microchips and semiconductors, and there were supply chain issues as factories faced problems. shipping, transport and labor.

These factors have led consumers to spend more and businesses to increase their prices due to increased demand and reduced supply. While the Federal Reserve initially claimed inflation was transient, Fed Chairman Jerome Powell recently said it was time to “withdraw” the word.

The Fed recently announced interest rate hikes to fight inflation. Interest rates have hovered around zero since the start of the pandemic. Rising interest rates mean it’s more expensive for consumers to borrow money, whether it’s for a credit card, mortgage, or college.

With rising interest rates and rising inflation, should consumers change their spending or borrowing habits in this new economic environment? If so, what purchases should consumers cut back on?

Select spoke with Barbara Ginty, CFP® and host of the Future-rich podcast, about what rising interest rates and inflation could mean for people who buy everything from a house to a grocery store.

It may not be possible to avoid the effects of inflation, but it’s important to know where it has the most impact, so you know what categories of spending you might want to reduce. While you might feel the pressure when it comes to buying everything, inflation has not had the same impact on all categories of goods and services.

Gasoline and cars (new and used) have seen dramatic price increases. From November 2020 to November 2021, the medium gasoline prices increased by almost 60%. During the same period, used car prices have increased by over 30% while the cost of a new vehicle has increased by 11%. So if you are looking to buy a car you might want to wait to buy one if you can.

After the fall in sales of new cars at the start of the pandemic, the price of new and used cars has skyrocketed this year. As consumer demand for automobiles has rebounded this year, automakers have struggled to keep up due to supply chain issues such as chip shortages. When the cost of new cars went up, people turned to used cars, but the price of those cars also went up.

If you absolutely have to buy a new or used car, it’s important to do your due diligence with your research. New cars sell for thousands of dollars above the Manufacturer’s Suggested Retail Price (MSRP), according to the WSJ.

Consumers can use sites like Edmunds, Kelley Blue Book and Car gurus to understand what price they should pay for a car of a certain year, model or make. When buying a used car, your best bet is to buy from a franchised car dealership that sells certified used vehicles. You might be spending more money upfront, but these cars are usually inspected and come with warranties.

Fax is also a useful resource for used car buyers: You can find the history of a used car, such as the history of its accidents and its last reported mileage.

You can also consider hiring or leasing a car until the prices drop again. If you already have a leased car, maybe now is the time to call the auto company and ask for a lease extension, says Ginty.

The other major expense that you might see increase over the next few months is the cost of a house (and mortgage) or your rent. Buying a home is often seen as a hedge against inflation, because as the cost of building a home increases like land, labor and materials, the value of the home increases. he existing real estate is also appreciating.

While house prices initially fell at the start of the pandemic, prices rose as many homes searched for homes in the suburbs or returned to cities. With soaring demand and a reduced supply of available-for-sale homes, house prices are up almost 20% from September 2020, year over year.

“The prospect of higher interest rates in 2022 will hasten the decision of buyers in an otherwise slower season,” George Ratiu, senior economist at Realtor.com, told CNBC. “However, the low number of homes for sale remains the main challenge, confusing both existing homeowners looking for their next home and first-time buyers looking for their own home.”

As a landlord, unlike renting, you can avoid the possibility that your landlord will increase the price on you. And with rents rising, it might not be a bad time to buy: according to one Apartment list report, the national median cost of rent has increased by more than 17% since January 2021.

If you are successful in securing a fixed interest mortgage, you will have a fixed monthly payment whether or not interest rates change.

“So if you were looking to buy a house, it would be great if you could lock in a 30-year fixed rate mortgage at these low interest rates because the rates are going to go up,” Ginty said.

While interest rates are expected to rise, rates are not expected to rise substantially, so this likely won’t have a big impact on mortgages. As of Dec. 16, 2021, the average 30-year fixed-rate mortgage was only 3.12%, according to data from Freddie mac.

Finally, you might see a slight price increase when it comes to your grocery bill. The price of all groceries has increased 6.1% since November 2020, and the cost of meat, poultry and eggs has increased further.

If you’re looking to cut costs at the grocery store, you may want to consider cutting back on your meat consumption, especially on expensive cuts of beef like rib eye and sirloin. You can go for cheaper meats like ground turkey or chicken, or you can try swapping out veggies or beans, depending on the recipe.

A credit card with grocery rewards can also help you save money on your daily expenses. With a grocery rewards credit card, you will get rewards or higher cash back rates for your grocery purchases. The American Express Blue Cash Preferred® card offers 6% cash back in US supermarkets up to $ 6,000 per year in purchases (then 1%). There is no annual fee for the first year of membership with the card ($ 95 thereafter). (see rates and fees)

Chase also currently offers a grocery benefit on two cards with no annual fee: the Chase Freedom Flex℠ and Chase Freedom Unlimited®. With the Grocery Benefit, cardholders will receive 5% Cash Back on up to $ 12,000 in grocery store purchases (excluding Target® or Walmart® purchases) during the first year of membership in the card.

Whether you notice a price increase when buying a steak at the grocery store or buying a new home, inflation can linger longer than you expect. While inflation hasn’t affected all expense categories the same, you may want to put certain purchases on hold, like new and used cars, until prices drop again. However, expected interest rate hikes and inflation could mean it’s a good time for other purchases, like a house.

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For pricing and fees for the American Express Blue Cash Preferred® card, click here.