What most people know about inflation is that it makes things more expensive. A simple definition of inflation is that it’s the increase in the cost of goods and services over a time period in an economy.
The Bureau of Labor Statistics (BLS) released the Consumer Price Index (CPI) data and CPI inflation came in at 8.3 percent over the past 12 months. The consensus view is that the “inflation tax” – the diminished value of your money – was high, but no longer rising.
Purchases of food (13.4 percent), energy (8.3 percent), and shelter (32.5 percent) (FES) constitute over half of the average family budget. The FES has risen by 10 percent over the past 12 months, considerably faster than the CPI as a whole. The inflation tax on family essentials rose to double digits (Daily Brief, AAF, May 2022).
While inflation is rising everywhere, price hikes are particularly devastating to lower-income households with already tight budgets. In most of these, nearly all their expenses go to necessities — food, energy, housing — which have seen some of the largest increases over the past year (Washington Post, Feb 2022). Lower-income households spent more on energy whose prices had large increases. So the bottom 90 percent saw their consumption expenditure go up because of rising inflation.
Think about how an increase or decrease in inflation could impact your life — including your grocery bill, short-term savings for emergencies, and retirement savings, as well as your earnings and vacation plans. Understanding how inflation works can help you make wiser financial choices, so you make the best decisions for your family (Harbour et al, 2017).