The effects of inflation are proving hard to stave off, and we are all feeling it on our budgets. From food to gas to home repair products, prices seem to be increasing every day. The Federal Reserve (we’ll call it the Fed) stated unequivocally that they are committed to raising interest rates and staying hawkish until inflation finally begins to subside.[1] Rather regrettably, this may take longer than many of us realize.

We’ve seen inflation come down in many areas, but food, energy, and wages are still sticky.[2] This poses a unique problem. Most of us can’t cut back on our food or energy consumption to any real degree, and few of us would be willing to take a job with lower pay. The Fed’s tools impact demand. Things generally get more expensive when interest rates rise, and we buy less of them as they get more expensive. As demand eventually drops so too do prices. The cure for higher prices is higher prices, as the adage goes.

But what happens when we can’t cut back and consume less??? That’s where we are today, and that’s what makes inflation so hard to beat. You might be thinking, “What can I do to mitigate the effects of inflation on my budget?” While inflation is nearly impossible to avoid, there might be ways to minimize its effects.

Change your shopping list

Economists call this the ‘substitution effect’.[3] We may switch from buying groceries at Whole Foods to buying them at Walmart, or switch from the name brand peanut butter (Skippy is the favorite in the author’s household) to store brand. Substituting one product for a cheaper similar one is a smart move when inflation creeps up, but this won’t be an option for everyone. Not all goods can be easily substituted.

Think of your car. You can’t just flip flop between premium and regular gas. And swapping out your car for a cheaper model with cheaper gas may be a fix, but there are taxes and transaction costs that eat into your margins. Not to mention the fact that you’re making what’s likely a 7–10-year purchase to solve what may be a 1–2-year problem. Substitutions work well, but they’re not a solution for everything.

Bite the bullet and change your habits

If you’ve made the easy substitutions but your pocketbook is still screaming for mercy, then you may need to change your habits and avoid purchases that fall into the ‘want’ category as opposed to the ‘need’ category. For example, airfares increased 37.8% due to supply chain shortages and COVID travel bans.[4] It may not be the year to crisscross the country or travel abroad. Nor is it necessarily a great time to remodel your kitchen, upgrade your vehicle, purchase a second home, or expand your jewelry collection. Luxury goods, expensive hobbies, and pricey leisure activities can wait.

Inflation Finds its Way into your Wallet

Inflation has impacted oil and gas prices, food, rent, and travel the most. To put that in perspective, meats, poultry, fish, and eggs, saw a 14.2% increase year over year, and gas saw a 30.2% increase year over year, compounded by the Russian-Ukrainian conflict. And now, rent inflation is pushing the cost of housing even higher than it already is.

These numbers may not have a great shock value now, but when your budget is covering less and less of your costs of living, the effects of inflation become all too real. However, there are ways to mitigate inflation by isolating segments of your budget and spending less on certain categories of your budget. But in addition to that, it’s important to understand how your income sources in retirement may be affected by inflation as well.

Protect Your Income Streams from Inflation

For those of us who are still working, inflation is a question of adjusting budgets to accommodate price increases while finding income, wages, or raises in the future to match and offset that inflation. Savings don’t usually have to be withdrawn and can be invested in ways to help mitigate inflation.

It’s a different story for retirees. Your savings are your income. Not only is your budget tighter now, but your future income may not necessarily keep pace with inflation. This places you in a position of even greater reliance on your portfolio, which is already creaking under the weight of the current bear market. The inflation problem is especially dire.

It’s tough to get through these periods, but not impossible. There are financial tools built specifically to respond to rising interest rates and inflationary cycles. There are lifestyle changes, budgetary changes, and product swaps you can make to ameliorate the problem as well. Talking to a financial professional is your first step towards protecting your retirement.

In calm markets, it can feel easy to see your retirement accounts meet your goals. But when the water gets choppy, it’s important to have a team of experts supporting you and your retirement to help you get through unexpected economic environments. Talk to us today to get started on your path to a comfortable retirement.