The REAL Cost of Inflation

The REAL Cost of Inflation

May 29, 2024

A lot has been said over the last few years about the continual increasing of the prices of goods and services. I think it can be simply put that many people feel like they are not better off than they were in years past. In fact, I would predict that every person reading this blog today has experienced inflation in some way or another. From the rising prices of gasoline to the increases in the prices of goods in the aisles of grocery stores around the country, we have all felt the pinch of inflation on our wallets over the last few years, especially those who have not had a comparable increase to their incomes. Our high inflation environment began in early 2021 with a peak in June of 2022 when the year over year inflation rate hit 9.1% according to the Bureau of Labor Statistics. Over the first few months of 2024, the year over year inflation rate has stayed around 3.1 to 3.5%. We know prices are rising but what has that meant for us practically? I want to go through some real-life examples to help quantify what we have all been feeling.

Like we talked about, inflation really started to grow exponentially in March and April of 2021. The inflation reading for March 2021 was 2.6% but jumped to 4.2% in April. To do an accurate comparison of how different our standard of living is we will use January 2021 as our starting point for the examples that I give. We will start with the overall worth of the U.S. dollar in being used to buy goods and services.

 

 

 

 

 

The buying power that you have with $100 today is significantly less than you had in 2021. You would need to have $119.87 in your pocket to buy the same amount of goods and/or services that cost you $100 in 2021. Restated in a different way, $100 dollars today could pay for the same amount of goods and services that cost you $83.43 in January of 2021. That may not sound like a large dollar amount, but that is an increase in prices of nearly 17% in less than 3 years. That does make a huge difference for the budgets of the average American family.

 

 

 

 

 

 

Now let’s look at more specific areas where you may be feeling a hole in your wallet. One line item that every family has in their budget is food. Food prices have not been excluded from this general inflationary period. If you feel like food is costing you more than it ever did in the past, you aren’t wrong. Take a look at your grocery bill next time you go shopping and compare it to trips you made in 2021. Is the total higher? I would be amazed if it wasn’t. While food prices have risen 2.7 and 2.2% in the last two years respectively, the cost of food as a whole rose 10.4% in 2022. On top of that, food prices rose by 6.3% in 2021 over against the previous year. Because of these increases, food has needed to become a larger part of your budget and will have caused your total expenditures on a monthly basis to rise as well.

One of the other main areas that we have all felt the rise of prices is at the pump. While gasoline prices have steadied, a 49% price increase in 2021 has led to prices having a cumulative rate of inflation of 22.1% since 2021.

 

 

 

 

 

 

 

I show you these numbers not to make you pessimistic about the economy or the difficulty to maintain your standard of living. I bring you these numbers to help quantify what we have all been feeling the last few years. You are not going crazy; prices really have changed significantly. That means two things for your finances. First, you need to update your budget. $100/week for groceries may need to be updated to $120/week. It may cost you $50 to fill up your gas tank every week instead of $40. We all know that prices have risen, but now is the time to adjust your budget if you haven’t already. The second action that should be prompted by this is asking yourself if you are factoring inflation into your retirement planning. If you have figured that you want to live off from $7,000/month in retirement, that’s great! However, you need to adjust that number yearly for inflation! We are currently at an inflation level around 3% as mentioned earlier, which is closer to our historical average. Make sure that your monthly income need is being increased on a yearly basis by inflation.

As always, thank you all for taking the time to read our blog. We appreciate the opportunity to connect with you all in this way on a weekly basis. If you have any questions for us or have a topic that you want us to right about, please reach out! My email is joshua.overbeek@lpl.com and our office line is (616) 820-0404.

Have a great rest of your week!


https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm

 

https://www.usinflationcalculator.com/