Is your budget affected? Here are 6 ways inflation affects your money.


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Does your budget feel stretched right now? It’s probably due to inflation, which affects your money in different ways.


Key points

  • By mid-June, the inflation rate was up 8.3% year-on-year, and that’s having a significant impact on most people’s finances.
  • The cost of groceries, from fruits and vegetables to dairy, has increased by more than 11%, which can blow your food budget.
  • Your savings rates, borrowing capacity and the value of your money can also feel the burn of inflation.

Over the past six months, the talks have veered from the unstoppable housing market to how inflation is affecting the economy — and for good reason. By mid-June, the inflation rate in the United States was up about 8.3% from a year earlier, which is a huge jump from what we have seen in recent years. In turn, the prices of everything you buy and the utilities you pay for have skyrocketed.

This alone weighs heavily on people’s finances. But while inflation makes everything we buy cost more, that’s not the only effect it has on your budget. Inflation affects your money in more ways than you think. If you’re wondering why your bank account balances haven’t been this far lately, here are six ways inflation is affecting your money.

1. Your food budget is collapsing

Essentials now cost a lot more than they used to, and that’s likely to have a big impact on your budget. Although supply chain issues have played a role in the rising costs of these types of essential products, much of it can be attributed to inflation.

According recent BLS data, the cost of food at home — items like fruits and vegetables, meat, dairy and other groceries — rose 11.9% from a year ago. That means millions of Americans are feeling the burn as they fill their grocery cart. Your grocery budget doesn’t stretch that far — and you can even dip into other parts of your budget to fill the pantry.

But it’s not just groceries that are more expensive than last year. If you occasionally order food from outside your home, whether in restaurants or takeout, you pay around 7.4% more on average compared to 2021. increased by 9% year-on-year ‘other.

2. Commuting to work depletes your funds

We all see what is happening with fuel prices. As of June 15, a gallon of gasoline hovered at an average price of $5.01, according to AAA. The average for a gallon of gas was $3.07 just a year ago.

So if you’re commuting to work or driving for other reasons, that extra $2 per gallon at the pump is likely putting even more strain on your budget.

3. Interest on your savings can’t keep up

Historically, the average interest rate on savings accounts has been quite low. If you’re looking to make money with your money, a savings account isn’t usually the best way to do it. Nowadays, however, the interest you earn on your savings money is practically negligible thanks to inflation.

As of mid-May, the average savings account rate was 0.07%, which would be about $3.50 a year in interest payments if your savings account held $5,000. While some banks, especially online banks, may offer slightly higher rates, it’s worth next to nothing.

But the inflation rate is currently hovering around 8%, which means your money is worth about 8% less than it would otherwise be. This means that the interest on your savings cannot compensate for the devaluation, even if you get a higher than average rate.

4. Your investments may be underperforming

If you have money tucked away in certain types of investments, you may not see them performing the way you expected right now. Although the impact of inflation on investments varies, assets such as common bonds and certificates of deposit (CDs) may underperform due to inflation.

In effect, you earn money on these investments through interest payments, which remain the same for the duration of the contract. So if your money is tied up in these types of investments, the returns may not do much to offset losses due to inflation.

5. The value of your money decreases

Unchecked inflation hurts your finances because it can, and does, reduce the value of your money over time. The rate of inflation we are currently experiencing is causing the prices of consumer goods to skyrocket. In turn, your money doesn’t stretch that far right now – and isn’t worth that much in the long run, either.

For example, let’s say you stash $2,000 in your sock drawer for a rainy day. If you take that money out of the drawer to spend in five or 10 years, you probably won’t be able to buy as much of it as you could have today, despite the higher prices we face due to inflation. .

Technically, you don’t lose the money you have set aside. All of this is still available to you, but its purchasing power is still much lower than it was before.

6. Your borrowing capacity may be reduced

Although the decline in borrowing power is not the direct result of inflation, it tends to occur in tandem with higher rates of inflation. This is because when inflation levels are high, the Federal Reserve typically raises the federal funds rate to try to slow the economy, which in turn impacts consumer interest rates.

It’s been done three times already this year, largely to try and stop the inflation spike. And, while rising interest rates have helped slow mortgage borrowing, they have also made it harder for borrowers to pay interest on large loans for big ticket items.

When you can’t afford the higher interest on buying a car or house, your buying power is reduced. In turn, that could be the difference between making your big purchase and waiting for rates to drop again.

If you’ve noticed that your money isn’t stretching that far lately, there are ways to help you combat these types of issues. While you can’t do much about the higher price of housing or groceries, you can make changes in other ways.

If you’re dealing with low savings rates, it can be worth researching new savings accounts – and online banks can be a good place to start. It can also be worth shopping around if you’re trying to borrow money for a big purchase or an expensive item. Rates can vary widely from lender to lender, so if you don’t shop around, you could reduce your borrowing power even further with above-average interest rates.

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