Why Inflation Rates Are Scaring the Hell Out of Me (and How You Can Beat Them)

I don’t really have to spell it out for you: you know it every time you shop. Inflation rates are soaring over the past year and it is now at its highest rate in four decades. It is hammering consumers, wiping out pay raises, and reinforcing the Federal Reserve’s decision to begin raising borrowing interest rates across the economy. I think, however, that they really missed seeing this coming. Frankly, although I am not an economist, I did see it and it makes me angry and scared when I think of what this inflation cycle is going to do to all of us.

Chart of rising numbers representing inflation rates

All of this it comes along with two years of a worldwide pandemic, so where is there any good news? The Labor Department said yesterday that “consumer prices jumped 7.5% last month compared with 12 months earlier, the steepest year-over-year increase since February 1982. Shortages of supplies and workers, heavy doses of federal aid, ultra-low interest rates and robust consumer spending combined to send inflation accelerating”. How’s that to go with your morning coffee and bagel?

What’s Next?

There is no sign that inflation will slow significantly any time in the near future. We are in an inflation “perfect storm” right now. Most of the factors that have forced up prices since last spring remain in place with wages rising at the fastest pace in at least 20 years.

When wages go up, you can be sure that those costs will be passed along by businesses to the consumer. It happens every time.

Then there are the issues with the ports and warehouses which are overwhelmed, with hundreds of workers out sick. Many products and parts remain in short supply as a result and demand is high. And oh yes, there’s one more factor which many are ignoring: profiteering among American businesses.

U.S. Cars and Profiteering

In case you missed this one, car prices are really, really out of control. You can hear all the talk you want about short supply, computer chips, and labor shortages, but the truth is that American car dealers are fleecing the American consumer.

Just this week, Ford and GM both told their franchisees to stop the practice of charging more that the MSRP sticker price on new cars they sell or else. In fact, in January, over 80% of new vehicle purchases were sold above MSRP! Ford and GM have threatened to cut off new car shipments to them if this continues. I hope you weren’t a victim of this one.

But It’s Not Just Cars

The steady surge in prices has left many Americans less able to afford food, gas, rent, child care, and other necessities. That comes despite financial aid that has been flowing to us for the past two years. Many people got stimulus checks, tax credits in the form of monthly checks, enhanced unemployment, and other cash programs to help us all. It has resulted in savings accounts being at the highest levels in decades. That was when there was basically nowhere to go and spend, but now that has changed dramatically. It appears that people are ignoring the COVID-19 issues and outspending at almost record levels. If you look at the GNP you’ll see the results, numbers we haven’t seen in my memory.

In the past year, these sharp increases in the costs of gas, food, autos, and furniture have upended many Americans’ budgets. In December, economists at the University of Pennsylvania’s Wharton School estimated that the average household had to spend $3,500 more in 2021 than in 2020 just to buy an identical basket of goods and services. For those of us on what we like to call a “fixed income”, that is a disaster. Add in the unemployed and the underemployed and you get the picture here.

Is a Recession Coming?

The Fed is moving now towards interest rate hikes, the first of who-knows-how-many will come in March. Those higher rates will raise the cost of a wide range of borrowing, from mortgages and credit cards to auto loans and corporate credit. For the Fed, the risk is that in steadily tightening credit for consumers and businesses, it could trigger another recession. That’s bad news. I guess: “transitory inflation” was a huge miss, wasn’t it.

What Can You Do to Defend Against High Inflation Rates?

There are some things you can do about this mess and they are things I have touted for years and years before. If you ignored them before, it may be time now to take these actions. Let me go down my list.

1. Shop smarter

It’s no longer considered being “cheap “or “frugal” to try to save on everything you buy. It’s a requirement. Unless you are the CEO of Starbucks (who just got a 40% salary increase this week), you need to do it.

That means knowing what a good price is (tracking before you buy, comparison shopping, using loyalty cards, coupons—both digital and paper) and using the internet to make all of this easier for yourself. If you don’t have a computer, use your phone. You won’t believe the deals that your phone will lead you to if you just try to find them! Smart shopping for everything is a huge way to save no matter what your kids might tell you.

2. Work smarter

It used to be that everyone aspired to work at a “good job” and make it until the day when they could retire, earn that gold watch, and sit back and relax. Yes, those days are gone for good.

The news isn’t all bad though. It appears that starting your own business is the trend and since the pandemic and the Great Resignation, hundreds of thousands of new independent businesses have been popping up.

If you lost your job, left your job, or hated your job, you can re-invent yourself as an entrepreneur.

The best way to do any of that is to think of a real need and try to fill it. Even if you have little or no money, it is possible to get this done. Use your computer to help by communicating with others, researching info, and establishing a website. Information that you have can be leveraged and sold to others for a profit. Someone once said you have to start somewhere and that some money is better that no money, so the internet can help you to fulfill both of those statements. If you want to start slower, or need time to gather funds to start your business, work for someone else and learn the ropes, then plunge ahead.

3. Home ownership

This is a big one. I fully realize that many younger people shun owning a home for many different reasons. First, it’s expensive and growing up faster than anything I can name right now. My little condo here in NJ has increased in value over 20% in just the past two years and that’s double the rate of inflation. Good news for me and millions of homeowners around the country. Your home is a big chunk of your net worth, if you have one. In my case, it represents about 49% of it. So yeah, I love having this “expensive” asset and you should want one too, in my humble opinion.

Renting is a keg of dynamite in inflation and recession cycles

If you rented my two bedroom condo right now, I’d have to charge you at least $2,000 a month and you’d have to pay for some of the utilities as well. And guess what? If you decide to stay next year and renew, I’ll raise the rent and charge you a little extra for the heating bills I forked out this winter, because I can. There’s a housing shortage and renters are out there. And by the way, $2,000 isn’t even the tip of the iceberg when it comes to rentals In NJ! If you live in NYC, just 60 miles away, you would pay way more than what I’ll charge you.

Home ownership also will provide you with a savings on taxes and give you much more liberty in what and how you live than living in a rental will (subject to a landlord’s whims).

Yes, a condo isn’t all that a “house” offers, but I do have a pool and tennis courts that I probably wouldn’t have if I owned my own single family home, now would I?

Credit?

At first blush, you may believe that you can’t even think about home ownership. If it’s because you need flexibility about where you live, job pressures, family concerns, I get it. There are times when it just may not be the right time. But if it’s a monetary issue, and you are paying ridiculous rents to have a place to live, it may make sense to consider it.

You need a down payment in most cases to purchase a home. It can be small or larger and of course you need to have sufficient credit to obtain a mortgage. Credit is essential in renting too, so I assume that you can think about a mortgage if you are spending on a rental that is costly.

Before you set off to get a mortgage, make sure you’re financially prepared for homeownership. Do you have a lot of debt? Do you have enough saved for a down payment? What about closing costs?

A home is a major purchase, maybe the biggest one you’ll ever make, so it’s no surprise that lenders really dig into borrowers’ finances before handing out home loans. If you’ve got substantial debt or don’t have much of a credit history, you may want to improve your financial health before applying for a mortgage. A thorough understanding of your income and debts will help you know exactly how much house you can afford.

There are ways to afford your own home

There’s a wide array of lenders to consider, including traditional banks, online non-bank lenders, and credit unions. If you’re looking for a particular type of mortgage, you may want to zero in on specialty lenders. For example, if you know you want a VA loan, a lender that focuses on working with military borrowers may best fit your needs. But no matter what kind of loan you’re seeking, you’ll want to consider the following.

Make sure you understand what the minimum qualifications are for any loan. For example, knowing a lender’s minimum credit score or down payment requirements can help you determine if you’re ready to apply for preapproval.

Check with the lender to see if it offers any unique programs that would fit your needs (for example, down payment assistance for first-time homebuyers). First-time homebuyers may benefit from loans with low down payment and credit score requirements. Some lenders for first-time homebuyers offer loans that are especially for newbies. Many states and some cities also have these special arrangements.

Final Thoughts

Inflation rates aren’t going down any time soon, so you must come up with a better plan if you want to keep firm financial footing right now. Think about not only a short-term plan, but the long-term as well. It isn’t crazy to think you should act now on something like homeownership, especially since home prices are skyrocketing and mortgage rates are about to balloon as well. Now is the best time for all things financial as it always is, only this time on steroids.

How are you dealing with inflation rates and are you frightened by the thought of a serious recession coming? Are you working now? Have you been paying high rents? Do you want someday to be a homeowner? Is that someday now?

4 Comments

  1. As far as rising vehicle prices go, we’re hoping to squeeze more mileage and repairs out of our vehicles that each have around 200,000 miles until sanity returns to the market. Plus avoiding long-distance trips.

    However, the housing market is where our greater focus is as having a roof over your head is pretty important…
    My wife and I made moves about 7 years ago to stop paying rent and buy a home after our rent back then went up a $100 or $200 dollars per month in a year or so and our income mobility was limited for our career fields (i.e., living expenses rise faster than salary increases).

    Sure, we have repairs but it’s nice to have equity and not wondering if the landlord is going to raise rent next contract because he can. And that’s not including the routine increases from rising property taxes, et al.

    I frankly don’t know what to tell aspiring homebuyers as it seems like they’re between a rock and a hard place right now.

    We have some family members in that situation and they are hoping rents don’t rise too much more but also hoping prices start to level out or decrease so they can afford the monthly payment for a 30-year.

    I’m curious to see how rising rate will affect demand and pricing.

    Just in our area in the semi-rural mid-south, a starter home that was built just a year ago sold for the low $200s. The owner sold it for $100,000 more (12 months after moving in, mind you) than the purchase price just because the market has gone crazy.

    The home is nothing glamorous and is just a little bit over 1,000 square feet. The trend is unsustainable but I’m unsure what to make of it long-term.

    1. Josh, you’ve obviously given a lot of thought to this subject, but it seems like you’ve made some good choices so far. Homeownership, even if it starts out on a small level, will still help build wealth. In time, you may be able to move to a larger living space, but that takes another thought process to determine if it’s something you really need or just want. I’m betting you’ll make a good decision since I can tell that you are not distracted and see things in a realistic way. Thanks for reading and good luck with your choices.

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