What is Inflation and How Can You Beat It?

Rising prices are making the necessities of life—food, housing, healthcare, transportation costs—and just about everything else, more expensive. What’s behind inflation? And how can you manage your money as your buying power shrinks?

Inflation Is Here. But What Is It?

Inflation happens when prices rise across a broad range of goods and services as demand outpaces supply. It’s not an entirely bad thing, as some degree of inflation may help drive economic growth. The Federal Reserve aims for inflation of about 2% to maximize employment while keeping prices relatively stable.

Economists use broad economic indicators to describe inflation. But most of us don’t need complicated metrics: We measure it by our buying power. If you’ve been putting fewer groceries into your cart—or paying more for them—you know the effects of inflation first-hand.

What’s causing inflation?

Not everyone agrees on what’s causing prices to rise. In general, it’s too many dollars chasing too few goods. Several factors are at play: The COVID-19 pandemic led to massive disruptions in the supply chain, which delayed manufacturing, which led to a scarcity of goods. Meanwhile, stimulus payments pumped cash into the economy, which may have spurred consumer demand.​​ This mismatch between supply and demand is thought to be a key cause of inflation.

Additionally, the Russian-Ukraine conflict drove up the price of oil, which further pushed up the prices of consumer goods. Also, inflation is tied to interest rates. The Federal Reserve sets the overnight interest rate banks charge to loan money to each other. When those interest rates are low (and have remained so for a long period of time), it usually leads to easy access to credit which can lead to “heat” in the economy (i.e., an uptick in inflation)—which eventually causes interest rates to rise once the government steps in in an attempt to curb overall price inflation.

How does the government combat inflation?

Adjusting interest rates is the chief measure the Fed takes to fight inflation. By increasing the cost of borrowing money, rising interest rates can cause consumers and businesses to think twice about spending on credit. Less spending means lower demand, so the thinking goes, which theoretically slows down price increases.

Cooling the economy in this way is tricky. Too little action, and prices continue to soar. Too much intervention, and a slowing economy could lead to recession.

How does inflation affect your finances?

The term “inflation” refers to global and nationwide changes, but you’re more likely to feel the economic effects of inflation personally:

• Rising prices can overwhelm your budget, making it harder to make ends meet;

• Rising interest rates can make it harder to afford loans and other credit;

• Economic uncertainty makes it difficult to plan and prepare for the future.

If you have some wiggle room in your budget, it’s easier to cope with rising prices. Having three to six months’ worth of living expenses in an emergency fund gives you resources to tap—or a bit of security if you have to reduce the amount you save temporarily. The more tightly your budget is stretched, the more challenging it is to cut back or find the additional dollars you need to cover essentials.

6 Steps to Help Beat Inflation

Wherever you fall on the inflationary impact scale, you can take steps to make rising prices less shocking and more manageable. Here are six suggestions for dealing with inflation:

1. Actively re-budget.

Inflation turns your budget into a moving target. Even if your spending habits haven’t changed, your costs are likely to be trending up.

Revisiting your monthly budget is key to knowing exactly where you stand. This means understanding exactly how much income you’re bringing in compared to how much you’re spending on fixed expenses like rent or mortgage, plus variables like groceries, gas, utilities, dining out, memberships and subscriptions.

Reviewing your recent income and expenses can help you know whether you’re making ends meet despite rising prices. Is your bank account balance dangerously low? Are you still contributing to savings? Have you tapped your emergency fund? Are you using credit cards to bridge the gap?

Upping your money management game can make a challenging time a little easier. Consider using your bank’s mobile budgeting features to track and categorize spending if you aren’t using a mobile finance app already. Set up text alerts to let you know when your bank balance is low.

2. Pinch your pennies.

Prices are rising everywhere, so save money everywhere you can. Some possibilities to consider:

Shop sales and warehouse stores. Make meal plans that focus on sale items or use this time to experiment with a plant-based (and cheaper-than-meat) menu. Taking time to compare prices can make a meaningful difference.

Inventory your cabinets, pantry, freezer, and refrigerator. Rotate food with the earliest sell-by dates to the front. Half-empty bottles of shampoo or body wash hiding under your sink or in your unpacked travel bag are still usable.

Shop for better values or negotiate better prices. You may find lower rates on car and home insurance, internet service, or a mobile phone package—with a new carrier or with your current ones. Offer to sign a two-year lease in exchange for reduced rent.

Use retailer and credit card rewards. Are cash back points stacking up, out of sight and out of mind? Go ahead and use them. And make notes to yourself about how to deploy your cards to maximize rewards.

Get the most from your bank or credit card issuer. Check the bank fees, rewards, and interest rates on your credit cards, checking account, and saving account. High-yield savings, for example, can earn you significantly more interest than a regular savings account. Here, rising interest rates help you. A rewards checking account may provide useful cash back while eliminating fees.

Dial back your water and energy usage. Programmable thermostats can conserve energy, and so can scheduling things like washing clothes or running the dishwasher during non-peak hours.

3. Boost your income.

Think about how to bring in additional income. With the labor market holding strong, this could be a good time to ask for a raise or promotion—or to look for a higher-paying job.

Getting a side gig is another option. Picking up a few hours a week doing gig work, freelancing, or using your professional skills as a consultant could generate the cash you need. If you have an extra car, furniture, household goods, clothing, accessories, or collectibles you’re ready to part with, these too can raise additional funds.

4. Be cautious with credit cards.

Credit card balances are increasing nationwide. The Federal Reserve Bank of New York reports credit card balances rose $46 billion during the second quarter of 2022, totaling $890 billion in consumer debt.

Credit cards are useful when unexpected expenses—or unexpectedly high prices—bust your budget. But running up and carrying large credit card balances that aren’t paid in full within a month or two, especially while interest rates are rising, can leave you with significant debt, and at a higher interest rate than you’ve been paying.

5. Consider consolidating and refinancing debt.

Rolling your credit card balances into a fixed-rate personal loan might save you money on interest, especially as credit card interest rates tick up. Interest rates on personal loans are generally lower than they are on credit card balances, and personal loans often come with fixed rates and fixed monthly payments. Personal loans are designed to be paid off in regular installments over a set period of time instead of “revolving” indefinitely like credit card balances, putting an endpoint on your debt repayment.

Refinancing your car or home might make sense, even though interest rates on car loans and mortgages are generally higher now than they were last year. For example, if you have significantly improved your credit score since you took out your car loan, you may qualify for a lower interest rate now.

Additionally, if the soaring cost of housing means that you now have enough equity in your home to drop PMI, it’s worth a call to your lender to ask about getting an updated appraisal on your home. Even if you have to pay for the appraisal yourself, the savings could be worth it over the long term.

6. Protect your credit.

Good credit can help you secure the best interest rates and terms on loans and credit. That’s valuable whether interest rates are high or low, so maintaining your score should be a priority. Here are a few tips to keep your credit in top shape:

Pay your monthly bills on time. On-time payments are the single most important factor in determining your credit score. Make at least the minimum monthly payment by your due date to avoid penalty interest and late fees. Setting up automatic minimum payments can help ensure that you don’t miss a deadline. Any late payment reported to the credit bureaus can bring down your credit score and linger on your credit report for up to seven years.

Keep your balances low. When you use too much of your available credit, your credit score may drop. Aim to keep your overall credit utilization under 30%; 10% or less is ideal. To figure out your overall credit utilization, add up all of your (revolving) credit card limits and credit card balances, then divide your total balances by your total limits and multiply by 100 to see the result as a percentage. For example, if you have $20,000 in total credit lines and $2,000 in total balances, your overall credit utilization is 10%. Credit utilization can also be calculated in the same way for each individual card to come up with a per-card ratio (e.g., a credit card with a $25,000 limit and a $5,000 balance has a per card credit utilization ratio of 20%).

Check your credit scores and reports regularly. Knowing your credit score can help when you’re shopping for loans and credit online, but it’s also wise to monitor your score regularly to make sure your credit is on track. Review your credit report from all three major credit bureaus (Equifax, Experian and TransUnion) for free at AnnualCreditReport.com to spot issues and errors, and check for signs of identity theft. A good rule of thumb is to obtain and review your credit report at least once a year at minimum.

The Bottom Line

No one knows how long the current cycle of inflation will last. Tracking your money carefully, spending less, monitoring your credit, and being a wise banking consumer are smart money moves no matter the economic climate.

Finding the right banking partner can help you make the best of inflationary times by giving you access to competitive rates on personal loans for debt consolidation or home and auto loans for refinancing. If you’re a saver, a high-yield savings account may help you reap some benefit from rising interest rates. And if you switch to or use a rewards checking account, you may earn interest and a bit of cash back to help defray your rising costs.

None of this makes dealing with inflation fun or easy. But if you can stay flexible and vigilant, the money skills you develop can help you through this inflationary period and on to whatever the economy brings next.