If there’s one word that caught everyone’s attention in 2022, it’s inflation.
While recent signs suggest the worst may be behind us, inflation remains a top concern for ordinary Americans and the Federal Reserve. And experts say it will likely be a few years before prices really come down from the highs they’ve seen this year.
Inflation data for July showed headline prices were flat, while core inflation, excluding food and energy, rose 0.3% – a better report than expected by experts and the rise the slowest since March. The most recent jobs report was solid, but that only adds to the complexity. Many economists say the low unemployment rate threatens to keep inflation high, which could mean more rate hikes from the Fed could come.
“Even with the likelihood that inflation has peaked, inflation will remain elevated for some time as supply chain issues persist and there is still a lot of instability with the war in Ukraine, which has caused significant swings in energy prices,” says Zach Stein, chief investment officer at Carbon Collective, an investment advisory firm.
We will need more than a month of inflation figures below expectations before the Fed can slow further interest rate hikes, experts say. And all the while, many Americans fear that a major recession is already well underway after months of high inflation and rising interest rates.
Economists say it’s too early to tell if we’re in a real recession, but the technical definition of a recession is of little concern to Americans who continue to deal with soaring prices. So we asked several experts how long the inflation spike could last and what people can do to lessen the impact on their finances.
When will high inflation come down?
Whether or not the United States has passed the peak of inflation remains a big question with no clear answer among economists.
Prices have started to fall in some of the most stubborn sectors, such as gasoline, airline tickets and rental cars, which is a good sign that inflation has peaked. But the truth is, no one can really predict what lies ahead. With so many factors at play — like the Fed interest rate hikes, the strong dollar, the war in Ukraine — it’s complicated to say the least.
Why inflation and high prices are likely to last for a while
However, economists and financial experts agree on one thing: the rise in prices will probably last until next year, if not longer. And that means Americans will continue to feel the pain of higher prices for the foreseeable future.
“It may still take a few years, but as we see supply chains finish adapting to these new realities and better balance supply and demand, I expect prices to come down as well,” says Stein. The reasons we saw such high inflation last year, he adds, are because of supply chains clogged by COVID-19 lockdowns and the invasion of Ukraine.
Like Stein, Robert Triest, department chair and professor of economics at Northeastern University, expects inflation to decline over the next two years if the COVID-19 pandemic continues to slow and the Russian war in Ukraine ends. Actions taken by the Federal Reserve, which is targeting a 2% inflation rate by raising interest rates, also make Triest more optimistic about lower inflation over the next two years.
Preston Caldwell, head of the US economy at Morningstar, has a more detailed view. He expects prices to remain high for the rest of 2022, but will drop significantly over the next two to three years.
“While the consensus has largely abandoned the idea that inflation will be transitory, we still believe that most sources of the current high inflation will decline (and even reverse) over the next few years,” Caldwell said. “Combining these factors with monetary policy tightening, we expect inflation to be below 2% in 2023 and 2024.”
How to deal with inflation
Soaring inflation took a break in July, but we are a long way from declaring the end of the inflation crisis. Inflation is affecting more people than ever, but you don’t have to sit idly by as your expenses keep rising.
There are do’s and don’ts that can get you through this period of high inflation, for as long as it lasts. Experts agree that you can protect your money from inflation by getting back to basics:
Adjust your budget
Start by carefully reviewing your budget and bills. Know what you’re spending your money on, how much you’re saving and investing, and look for areas where you can reduce your spending. Recurring subscriptions, phone, internet, and even car insurance are examples of common bills that could be cut or reduced.
“Everyone notices how much everything costs. It means being more mindful of our spending,” says Larry Pon, a financial planner based in Redwood City, Calif.
Looking at your bills and cutting out the unnecessary is a good place to start. You’ll still have to pay for essentials like food, gas and housing – and that’s when things get more expensive.
There are also ways to become savvy by saving on the essentials. For example, you can plan your meals further in advance and try to find recipes that use the same ingredients, so that no food is wasted and you can buy cheaper items at the grocery store. You can also try to take advantage of coupons and cashback portals to save.
It all comes down to planning more carefully to manage your budget, says Pon.
“Before you make that long drive to a restaurant you really like, you might consider going to a similar restaurant closer,” he says. “Instead of buying expensive beef, buy chicken instead.”
Increase your emergency fund
If your money isn’t going as far right now because of inflation, it could also mean that your emergency fund is too small. Experts generally recommend saving between three and six months of expenses, but that may not be enough these days.
Take the time to review your emergency fund – the pile of savings you keep for unexpected expenses like a car repair, a hospital visit or a job loss. Changes in life circumstances, such as inflation, may necessitate a change in your savings, and it may be a good idea to increase your savings in your emergency fund if you can afford it. If you don’t have an emergency fund, make a plan and look for ways to start saving even a few dollars each month for the future.
Stock markets are down this year, and that’s good news for long-time investors because everything is for sale. Stocks and index funds are cheaper than ever, and you have the opportunity to take advantage of them by investing. Historical data shows that the stock market always rises over time, so short-term ups and downs shouldn’t matter as much if you have a diversified long-term investment plan.
A falling stock market or soaring inflation can make you question yourself, but investing the extra money you have, outside of your emergency fund, is one of the best ways to keep up or even outpace inflation. In other words, a dollar today can be worth more than a dollar tomorrow if you invest it correctly. Experts generally recommend sticking with index funds because they offer a reliable and profitable way to build long-term wealth that is suitable for almost all investors.
If you have a savings goal that you’re trying to reach within one to five years, a Series I inflation-protected savings bond could be a solid short-term investment. With a yield of 9.62%, Series I savings bonds are considered one of the safest investments.
Don’t go into more debt than you can afford
As rent, fuel and grocery costs rise, more and more people are turning to debt to cover their expenses. Credit card debt has been on the rise since April 2021 and is currently up more than 15% from a year earlier, marking the biggest increase in over 10 years. At the same time, interest rates are rising and it is becoming more and more expensive to borrow money.
“As Americans survive on ‘borrowed’ money, personal finances continue to be a major source of stress for many consumers,” says Natalia Brown, chief operating officer at National Debt Relief, a debt settlement company. debts. “With heavy shopping seasons approaching, including back-to-school and holidays ahead, we can only expect the debt to continue to mount.”
The best way to avoid high interest debt, which usually comes in the form of a credit card, is to only charge what you can afford to pay and pay your balance in full and on time each month when your statement is due. Most importantly, prioritize building your emergency fund so you’re better prepared for unexpected expenses and don’t have to resort to credit cards or other forms of high-interest debt. raised.