The Consumer Price Index (CPI), the government's main gauge of inflation, rose 5.4 percent the 12 months ended July, the highest reading since 2008. Although some economists say that the rise in prices is a temporary side effect of the COVID-19 pandemic, even fleeting inflation can hit households — particularly those of retirees who live on a fixed income — hard.
Inflation is cumulative and, much like compound interest, adds up over time. For example, the CPI has risen at a 1.9 percent average annual rate the past 10 years, according to the Bureau of Labor Statistics (BLS). That means an item that cost $10 a decade ago now costs about $13 — a 30 percent increase.
You can't avoid inflation entirely, but you can do your best to minimize its effects on your budget. Here are five ways to take the sting out of the rising cost of living.
1. Seek out cheaper substitutes
The CPI represents a basket of consumer goods, but not every good in the basket rises at the same time. Food, for example, rose 4.6 percent the past 12 months. Within the food basket, steaks rose 10.7 percent and bacon jumped 11.1 percent. Switching to hamburger (up 0.4 percent) or fresh whole chicken (up 2.2 percent) could ease some of the food inflation indigestion.
You might also want to reduce going to restaurants, because eating out has become 6.2 percent more expensive than it was 12 months ago, the BLS says. And those QR codes that let you pull up menus on your smartphone only speed up the increase. “Historically, we had printed menus, which prevented restaurants from raising prices quickly,” says Sri Reddy, senior vice president of retirement and income solutions at Principal. Now, prices can change with the click of a mouse.
2. Ask your boss for a raise
If you're still working and the cost of living is stretching your budget, you might be able to get some breathing room from an unexpected source: your boss. Wages tend to rise in inflationary periods. The average hourly earnings of all private U.S. employees have gained 4 percent over the past 12 months — still well behind inflation, but also well above the average 2.7 percent annual increase the past decade. During your annual review, you might mention that your cost of living has risen and that your wages should rise commensurately.
If your boss refuses to budge, put out feelers to other employers. You won't be alone. A new PwC survey shows that two-thirds of employees are looking for new jobs. Companies are offering hefty signing bonuses and added benefits to new employees, particularly in industries where there are lots of job openings. The Job Openings and Labor Turnover Survey showed that U.S. employers were looking for 10.1 million workers at the end of June, an all-time high for the data series. And the number of people quitting jobs in search of new ones rose 2.9 percent, to 3.9 million.
3. Ease up on energy usage
Soaring energy prices are the biggest driver behind inflation, and, although it's tough to get by without gasoline, heat or electricity, you can cut down on your energy use. A simple way to reduce your gasoline bill, for example, is to plan your errands and try to do them in one trip, rather than a half-dozen throughout the weekend. Another is to slow down: Above 60 miles an hour, fuel efficiency drops significantly. And stop racing away from the stoplight: Quick acceleration and deceleration can cut your mileage by as much as 33 percent.
Your energy bills don't stop at the garage: You'll use plenty of it in the summer and in the winter. If you're worried about a big heating bill this winter, the Low Income Home Energy Assistance Program (LIHEAP) has been helping low-income families pay their heating bills for 40 years. And if you'd simply like to slim your heating bill this winter, ask your utility company for an energy audit, which would help you find energy leaks and appliance inefficiencies.
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4. Mind your debt
Keeping your debt low is always a good idea. Typically, however, interest rates start to rise when inflation rises. If you have variable-rate debt, it's increasingly likely that your variable rate will start to variate upward soon.
So unless you plan to move in the near future, it's probably time to refinance your variable-rate mortgage to a fixed-rate note. Similarly, if you have variable-rate credit card debt — almost all credit cards come with variable rates these days — and can't pay it off immediately, you might want to look into fixed-rate alternatives. Consider taking out a personal loan or home equity loan to consolidate debt and pay it off at a fixed rate. “For most people it is better to lock in fixed rates when you're sitting at historical lows than carry variable rates,” Reddy says.
5. Buy in bulk
The basic premise of an inflationary economy is that buying something now is cheaper than buying it later. There are some exceptions to that, such as cellphones, but if you think that prices are rising, now is the time to buy rather than waiting. If you like a particular wine, for example, consider buying a case rather than one bottle. Many wine sellers also offer a discount when you buy by the case, perhaps 10 to 20 percent. Even if you get sick of it, you'll always have something to bring to a housewarming party.
Obviously, you can't buy everything in bulk. Where would you put it? But If you see some items on sale today that can be stored for a long time — paper towels, canned goods, dog food, gym socks — you'll be ahead in the long run.
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner's USA Today investing column ran in dozens of newspapers for 25 years.