Coping with the new inflation

Coping with the new inflation

September 17, 2021

Q: I don’t know if it’s just me, but my paycheck doesn’t seem to go as far as it used to. The government says inflation is low, but I’m feeling a real squeeze. It is really as low as they claim?

A: Welcome to the world of creeping inflation. Consumer prices have been rising steadily for months. In fact, for the past four months, the annual rate of consumer inflation has averaged 5.3 percent—a rate not seen since the early 1990s. Sometimes inflation happens so gradually you don’t even notice it. However, inflation this time around has been much more obvious. For example, I bet you can remember a time this year when you first saw higher prices at your favorite restaurant or when you had to pay more for a haircut or a tank of gas.

You should also keep in mind that the CPI measures the change in prices for a basket of goods and services that economists think reflects general consumer behavior. To the extent that your personal behavior differs from assumptions built into the CPI, your personal inflation could be very different from the CPI. For example, the latest CPI data shows that the prices for “food away from home” increased by 4.7 percent over the past year, while “food at home” prices rose only 3.0 percent. Therefore, if you tend to eat out more than others, you probably experienced higher inflation than the CPI reported.

Gasoline prices provide a more dramatic example. Gasoline prices are up 42.7 percent over the past twelve months, but they only account for 2.8 percent of expenditures in the CPI basket. But let’s suppose you have a longer-than-average commute and gasoline accounts for 5 percent of your consumption basket. In that case, your personal inflation would be almost a full percentage point higher than the reported figure.

Q: I am trying to get my budget under control. Do you have any ideas for how to better live within my means?

A: If there were a financial equivalent to Maslow’s Hierarchy of Needs, the first level would definitely be “live within your means.” From a financial standpoint, nothing meaningful can happen if that first level is not being met.

If you find it difficult to live within your means, you have two choices: 1) you can cut down on your spending, or 2) you can increase your income. Given that workers are currently hard to find, now may be a really good time to ask your boss for a raise. However, if you feel uncomfortable with that course of action, here are some ideas on how to reduce your spending.

  1. Get back to basics. Learn how to prepare your meals from raw ingredients purchased in bulk. It takes more time, but with a little practice, the results will taste better, be more nutritious, and cost significantly less than most prepared foods you can buy.

  2. Shop with a plan. You can save on food costs by being more intentional with your menu planning and grocery shopping. Check the newspaper for flyers and coupons and then plan your menu around the special deals.

  3. Cut the cable. According to a recent article in U.S. News & World Report, the average cable package now costs $217.42 per month. If you are paying that much for cable, you can probably shave about $100 off your monthly bill by converting over to a decent internet-only package.

  4. Take a time out. Before you make a big purchase give yourself a cooling off period. You might set a dollar threshold for your waiting period. For example, you might say any purchase over $100 automatically requires a 3-day time out to make sure it is really something you want or need.

  5. Sell that old car. An old car that’s just sitting around is costing you money in three ways. First, it continues to depreciate. Second, you still need to insure it. Third, it still requires regular maintenance. On the other hand, now is a really good time to sell used vehicles. You might be pleasantly surprised by what it will fetch.

Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them