If you’ve found yourself feeling that things are getting more expensive lately, you’re not alone, as the U.S. just experienced its highest rate of annual inflation in more than 40 years. This has caused many to re-evaluate their monthly budgets, making cuts as needed to afford the new cost of goods and services on their relatively unchanged incomes.
But what’s causing this increase in prices, and should you be adjusting your financial plan?
Why things are getting more expensive.
The exact reason why things are getting more expensive is nuanced. But, often, the price of goods and services goes up at a fairly consistent pace, typically 2-3% per year. This is known as inflation and is a normal part of any economy.
That said, the current inflation rate is above and beyond what we usually see and is causing alarm among many American households as costs feel like they are getting out of control.
One of the reasons behind the price increases is supply chain issues. First, the global pandemic and the associated lockdowns, created an unusual series of events. Everything from decreased demand for goods, to the reduced supply of labor to the manufacturing and transportation of goods. Then, as demand came roaring back, there were supply chain bottlenecks as manufacturers and distributors attempted to meet this resurgent level of demand.
This has caused a lack of supply combined with an abundance of demand, giving many companies the ability to raise the prices on the limited supply of goods they have to offer. In addition, many companies have experienced increased transportation costs, causing them to pass those additional costs onto the consumer.
This results in higher prices at the gas station and checkout line, as the typical American budget squeezes to fit these new prices. In addition, many companies have started to shrink the size of the goods they offer to keep costs consistent, a phenomenon known as shrinkflation.
Many consumers have found that companies are deciding to shrink the size of the products they offer rather than only increasing the price, known as shrinkflation, resulting in less bang for your buck. Fox Business recently reported that everything from the size of yogurt cups to the number of Ziploc bags per box is decreasing as companies attempt to cut costs in unique ways. This is leading to smaller jars of peanut butter, smaller rolls of toilet paper, and smaller loaves of bread, all for the same or even slightly higher price as before.
There is a lot of debate in the financial community around whether the effects of inflation will be short-lived and transitory, or whether they will be here to stay. Ultimately, no one knows how it will play out. Still, the fact that some companies are heavily investing in packaging changes, process changes, and even some machinery changes to accommodate this new landscape may signify that higher prices and shrinking goods are here to stay.
What can you do about it?
For many people, the most critical question is, what can I do about it? Here are a few tips and adjustments you can make to combat these rising prices and position yourself for long term financial success:
- Re-evaluate your assumptions.
As a CFP® professional who helps people grow, manage, and maintain their wealth, I constantly have to make judgment calls and assumptions about what the future might hold. As I help families craft a financial plan for their personal situation, I consider what the markets have done throughout history and what we can expect them to do going forward.
Whether you’re self-managing your wealth or working with an advisor, this is a particular time where it may be beneficial to re-evaluate some of those assumptions you’ve made when crafting your financial plan, especially with regards to the cost of living and inflation projections. Ultimately, these assumptions flow downstream to your retirement plan as well. As a result, when you modify your assumptions or “stress-test” them, you may find that your initial retirement spending projections and income needs are no longer sufficient in this new environment.
- Invest in companies.
An interesting element to the rise in prices of goods and services is that as prices go up, certain companies generate higher revenues, ultimately leading to better performance and potentially higher stock market valuations. This can provide a boost to stock owners as their shares can become more valuable as the companies they own generate higher revenues.
While this is usually not reason enough to adjust your asset allocation and purchase more equities, you still benefit by owning particular stocks in companies raising their prices.
- Ask for a raise.
While there has been a recent shortage in certain goods, causing prices to rise, there has also been a labor shortage, forcing companies to compete for workers. Ultimately, this leads to a situation where workers have more power to negotiate salaries and compensation, knowing that if their employer doesn’t give them a raise, they can likely find a competing employer who will.
A great way to combat higher prices is to earn more income. And while negotiating a salary increase can be a complex and challenging situation, it may be a great time to have that conversation with your employer because of the labor supply shortage.
- Compare prices.
Last but not least, a great way to navigate higher prices is to check and compare the prices of goods and services. For example, at the grocery store, many look at the price tag on the shelf but never actually check the cost per unit. The price per unit shows the actual amount you pay per ounce, pound, or item and is a great way to compare the price of similar things sold in different quantities. By checking the cost per unit, shoppers can ensure that they get the best bang for their buck and avoid overpaying at the checkout line. This also holds for large ticket purchases as well. I’m hearing more and more stories of car buyers shopping online for cars in neighboring states, even if it means driving a day to get their new car.
I am here to help.
As a CFP® professional with over three and a half decades of helping clients transition into and make the most of their work-free years, I am here to help. My work centers around helping you maximize the enjoyment you receive from your money, all while creating a financial plan that works and is built to last.
The work I do is multi-faceted, just like the clients I serve. If you’re interested in a free introductory conversation where I can explain how I help while hearing about your unique situation, then Schedule a Call Today.