Fed Changes its Stance on Inflation – Here’s How to Navigate Rising Prices

Blog posted On December 28, 2021

Inflation has been soaring at increasing paces. Prices according to the consumer price index hit almost 40-year highs when it came out earlier this month. Two weeks ago, the Federal Reserve redefined their assessment of the current inflation levels and are no longer using the word ‘temporary’ to describe them. When inflation is high, it can put a strain on your wallet. To help you weather the inflation storm, here is what financial planners are saying you should do with your money.

1. Avoid buying a car if possible

Auto loan rates may be low, but sales prices are soaring high. Over the past year, the sales prices of new cars have surged over 11%, according to the consumer price index. The sales price of used cars has jumped even higher – up 31.4% year-over-year. “If your car works and gets you to work, then stick with it,” says Jay Zigmont, a certified financial planner (CFP). “Try paying for a complete detailing of your car and it will feel new to you without the sticker shock,” he says. If your car lease is running out in the next few months, it might be worth buying out the lease as opposed to shopping around for a new car. Buyout prices have been lower than resale value.

2. Grow investments vs. savings

Borrowers and investors benefit from inflation because it can make it easier to pay off your loans. On the other hand, consumers who are more prone to save their money might not benefit from inflation as much. “Your cash at the bank makes close to no interest, yet prices are increasing on everything you buy,” says Matt Elliott, a CFP and founder of Minnesota-based Pulse Financial Planning. “That can cause your purchasing power to degrade over time if you aren’t invested.” Elliot recommends that consumers invest in a diversified portfolio that includes investments that will go up in inflation. “Many young people sit with lots of extra cash as they are unsure what to do with it, but that can be harmful now,” says Thomas Kopelman, cofounder of Indiana-based AllStreet Wealth. “You should only have cash for an emergency fund, as well as cash for short-term goals (vacation, down payment of house, etc.), then you need to invest the rest.”

3. Buy more vegetables and fish

When it comes to your day-to-day living, financial planner Elliott Appel recommends shifting your grocery list from items that have been highly impacted by inflation to items that have been relatively unchanged in price. For example, beef prices have increased by over 20% over the past year. Fish products, however, have not seen any noticeable increases. So, if you’re looking to cut down costs in little ways, consider swapping out steak night for some nice fish. “You can research what's gone up the most over the past year and perhaps buy less of it,” Appel says.

4. Spend less

Periods of high inflation are a good opportunity for you to reassess your budget. “When necessities begin to cost more, discretionary spending should be reevaluated so as to not neglect the things that are necessary,” says Dana Menard, a CFP and founder of Minnesota-based Twin Cities Wealth Strategies. For example, you could cancel your lesser-used subscriptions, and really focus on the essentials instead.

With the Fed increasing its piece of asset tapering, and the benchmark interest rate hike on the horizon, inflation should start to subside in the coming year. If you have any other questions about the Fed’s impact on your wallet, let us know.

Sources: Fortune, MarketWatch