Inflation: What’s causing it, when it might slow down and what you can do about it

If you’ve been paying more for the products and services you regularly buy, you’re not alone: Bankrate survey data shows that 90 percent of adults have felt the effects of higher prices over the past year. However, those increases should not come as a major shock. The pandemic upended everything, and your wallet wasn’t spared from the impact.

Now, the world is grappling with the question on every economist’s mind: How long will this pace of inflation last?

Transitory inflation vs. traditional inflation

It’s important to understand that inflation isn’t a new phenomenon. Traditionally, year-over-year prices have risen between 1 and 2 percent.

Today, though, the conversation about inflation has shifted to include a word that has been dominating the American lexicon, thanks to Federal Reserve Chair Jerome Powell: transitory. This is the Fed’s term for temporary. Initially, the belief was that inflation pressures would be a relatively short-lived consequence as the economy regained its footing after shelter-in-place orders and shutdowns.

More recently, the debate has shifted with the broader public wanting a forecast for how long this “transitory” period will last. One year? Two years? Even the Federal Reserve has acknowledged that inflation is running hotter than anticipated and that it may stay elevated longer than expected.

What’s causing higher inflation?

Around the world, supply chains have bottlenecked, resulting in price increases on a wide range of scarce products — the paint needed for a fresh coat of color at home, the semiconductors needed to manufacture cars, the pork needed to be served on dining room tables, to name a few.

In addition to a shortage of products, there is a shortage of people to deliver services. The labor market is recalibrating as employers have to work harder to attract talent. With nearly 11 million open jobs, plenty of companies are boosting pay in order to retain their current workers and fill open positions. Those higher costs for workers ultimately make their way to the end customers, leading to higher prices. And for those workers, higher wages are good news — but only if they can exceed the higher household expenses they’re facing.

While the supply chain is broken, the appetite for consumption is quite healthy. There is an unprecedented level of pent-up demand among consumers who are ready to enjoy post-lockdown life. Oil prices have soared as the global economy has rebounded, leading to higher gas prices and a forecast for higher heating costs at home this winter.

How long will inflation last?

In recent months, there has been evidence to support the Fed’s transitory thesis. Used car prices, lumber, airfares and hotel lodging expenses — all of which had spiked as demand exceeded limited capacity — have started to calm.

However, other elements of the economy show that price pressures are a bigger story with no sign of a clear closing chapter. The largest line item on a household budget — the monthly cost of the actual house — is facing serious pressure amid surging home prices and higher rent prices. Data from apartment rental site Zumper shows that median rental prices for two-bedroom apartments have increased by more than 13 percent in the past 18 months. Anyone looking to buy a home or renew a lease is facing some serious headwinds that don’t seem likely to dissipate anytime soon.

So when will this all be over? No one can be sure. Even after the dust settles, we may be looking at an inflation rate that runs between 2 and 3 percent instead of the sub-2 percent range we were accustomed to during the decade leading up to the pandemic.

What can you do to protect yourself from inflation issues?

You don’t have much of a say over the way the broader economy moves. After all, you’re not going to be able to find more shipping containers to get global trade moving. However, there are some ways you can plan ahead to protect your personal finances:

• If you’re a homeowner, take advantage of refinancing your mortgage: Despite being in a record-low rate environment, nearly 75 percent of homeowners have not refinanced their mortgages. If you have excellent credit, you may be able to cut your monthly mortgage payment by a few hundred dollars per month. That frees up valuable room in your budget at a time when the cost of so many other products is on the rise.
• Be a savvy shopper: Thrifty, economical, frugal — whatever you want to call it, it pays to focus on every price tag. Take advantage of the sale ads at your supermarket, or look out for coupons on the household items you need. Additionally, make sure you’re part of free loyalty programs. Those exclusive discounts and extra points can be another avenue for saving.
• Focus on what’s in your control: While you can’t dictate the price at the gas pump, you can think about ways to reduce the amount of driving you need to do. And when you’re at home, you have the steering wheel for the thermostat.
• Don’t reinvent your approach to investing: Inflation headlines can paint a scary picture, but that doesn’t mean you need to lose sleep and completely adjust your approach to money management, especially when it comes to your investments. If you have a properly diversified portfolio, you already have a healthy allocation toward inflation-resistant investments such as stocks and real estate.