Americans of all income levels don’t need a Consumer Price Index (CPI) number to tell them that prices are continuing to rise, and at an increasing rate. They see it every day.
The bottom 60% of American earners can’t achieve a “minimal quality of life” that offers “opportunity, dignity and the ability to pursue one’s potential,” according to the Institute for Shared Ludwig Economic Prosperity (LISEP) [1].
And wages aren’t keeping up with inflation.
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Inflation affects households differently
About two-thirds (64%) of Americans polled by CBS News from August 29 to September 2 noticed that prices had gone up over the previous few weeks — and 67% expect prices to keep going up over the next few months [2].
However, CPI is an aggregate number, which means individual experiences can vary significantly. The inflation that your household experiences can be influenced by factors such as where you live, your income and how you spend your money.
Take energy prices, for example. The current administration has been targeting gasoline prices — and these have indeed fallen 6.6% year-over-year, according to the Bureau of Labor Statistics [3].
However, the administration may be better off targeting electricity prices, which have risen 6.2% year-over-year — and which, as of May, were edging closer to consuming the same amount of disposable income (1.15%) as gasoline (1.59%), according to Bloomberg [4].
What’s more, gasoline prices are expected to stay near 20-year-lows over the short term and possibly into next year. The U.S. Energy Information Administration (EIA) Short-Term Energy Outlook projects regular-grade gasoline to drop 20 cents per gallon compared to the same time last year, averaging $3.10 a gallon [5].
At the same time, electricity prices are expected to keep rising. The EIA estimates retail electricity will outpace inflation through 2026.
So, if you consume more electricity than gasoline, your inflation rate could be higher than a household that devotes a higher portion of its income to gasoline.
Read more: How much cash do you plan to keep on hand after you retire? Here are 3 of the biggest reasons you’ll need a substantial stash of savings in retirement
How inflation could impact your household
To get a sense of your household inflation rate, keep a record of your expenses for a couple of months.
Then, using the Bureau of Labor Statistics CPI as a guide, categorize your expenses into broad categories such as food you eat at home, food you eat away from home, gasoline, electricity and clothing [6]. You can then check these against the most recent CPI report to see how much each category is rising.
Trying to preserve as much of your disposable income as possible while still maintaining a healthy savings rate may be more important than ever. The cost of living could be higher when you retire, which means you may need to adjust your retirement savings goals.
It could be a good time to speak to your advisor to ensure your savings are invested in assets that will help your money grow faster than inflation.
Fighting back against a higher cost of living
If you’re already retired and on a fixed income, inflation can erode the value of your assets and put a serious dent in your spending power.
Your Social Security benefits will be adjusted for inflation, so if you wait as long as possible to claim them — which will also increase your monthly benefit payment — you’ll have more inflation-protected income.
Make sure your nest egg is invested and withdrawn with inflation in mind. If the cost of living is still unmanageable, you may need to consider going back to work part-time or relocating to a less expensive location.
Similarly, if you’re not retired yet, moving or downsizing in retirement may provide substantial cost-of-living relief. In addition to adding a side hustle or a second job, you could also try to get a raise at your current job or consider changing jobs to one that pays better.
Regardless of your approach, understanding where you’re experiencing the greatest price increases and how this is affecting your household budget is a useful first step in getting ahead of inflation.
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[1]. Shared Ludwig Economic Prosperity. “Majority of Americans can’t achieve a minimal quality of life, according to New Ludwig Institute Research”
[2]. CBS News. “CBS News poll finds Americans describe "uncertain" economy as its ratings tick slightly back down”
[3]. Bureau of Labor Statistics. “Consumer Price Index summary”
[4]. Bloomberg. “Pump prices aren’t the problem for Americans. Plug prices are”
[5]. Newsweek. “Drivers get great news as gas prices predicted to plunge to 20-year low”
[6]. Bureau of Labor Statistics. “Consumer Price Index”
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.