The Top Two Financial Challenges right now in America: Inflation and Cost of Living

The Top Two Money Problems for Americans right now.

Higher Inflation and the ever-rising cost of living are the top financial problems Americans have faced throughout the year. The inflation rate skyrocketed to a 40-year high in the second quarter of 2022, causing goods and services to be more expensive for low-income households.

Inflation and Cost of living are the biggest financial problems of American households in 2022, and their significant impact on their financial situation brought me to write about this topic today.

In this article, we will discuss a few critical findings: The Ramsay Solutions published in “The State Of Personal Finance In America 2022” quarterly report and the impact of high inflation on the Cost of living of low-income households in the United States. 

Inflation and Cost of living

Living costs are determined by the expenses required to sustain a particular lifestyle, which varies by location, person, and city. Conversely, inflation refers to the rise in the price of goods and services over time in an economy. Inflation occurs when prices rise for the same set of goods and services. 

The Cost of living is required for basic expenses, such as food, shelter, transportation, and healthcare. The average household expenditure in the United States is $61,334 annually.

Employers use the Cost of living indexes when setting wages or government agencies when determining the need for welfare interventions, such as Social Security benefit adjustments. Individuals also consider looking at the Cost of living index while relocating from one state to another.

Inflation: Impacting the Purchasing Power of the Consumers

Inflation can significantly reduce some consumers’ purchasing power and the currency’s value, particularly during periods of high inflation. This loss of real income is the most significant disadvantage of inflation. Fixed-rate recipients and payers can also lose purchasing power over time due to inflation.

Key findings of the report

  • According to the report, Inflation is the biggest financial problem in 2022 for 40% and the cost of living for 39% of Americans. These results indicate that Americans are concerned about the potential for rising prices and its impact on their ability to afford necessities.
  • 33% of people in America are struggling either with finances or crisis. Many people live paycheck to paycheck to make ends meet. And it becomes tough to manage finances when an unexpected expense comes up. If you’re struggling, you must seek support to get back on your feet. Many resources are available to assist you; you shouldn’t be afraid to ask for help.
  • Shockingly, the next generation is struggling with their finances the most. The next generation is having a tough time managing their finances. They are saddled with student loans, credit card debt, and other bills. They are also trying to save money for a down payment on a house or retirement account and looking for investment opportunities. Managing everything as per plan during an inflationary period seems to be a difficult job for the next Gen. 
  • Over 60% of renters find it difficult to cover their rents. The housing market is soaring and becoming a reason for financial stress among Americans. The rise in home prices is outpacing wage growth, making it difficult for many people to afford a home. This is especially true in high-cost areas like San Francisco and New York City. Rents are also rising, putting a strain on tenants’ budgets. These all lead to increased financial stress for many Americans and push them back from achieving financial goals.
  • Almost 60% of people in America are under financial pressure to manage their general finances daily. The main reasons for this are not having enough money to cover basic expenses, being unable to save money, and having too much debt. This can be a vicious cycle, as financial stress can lead to poor decision-making and further financial problems. Reducing financial stress by creating a budget, cutting back on unnecessary expenses, and paying off debt quickly is paramount.

Impulse Buying continues amid high Inflation.

Despite consumers altering their spending patterns to battle inflation, impulsive buying remained pervasive. Over 35% of Americans have made at least one impulsive purchase in the last three months, most of which were food items purchased in a store.

About 25% of consumers impulse-buying on social media, nearly 60% feel guilty after buying things impulsively, and 64% are more likely to incline towards impulse buying when stressed.  

However, the good news is that 85% of people admitted that budgeting helps them to control impulse buying.

Effects of Inflation on low-income households

Inflation can be defined as a continuous increase in the general price level of goods and services in an economy. Inflation affects different societal groups, but it typically hits low-income households the hardest.

This is because Inflation causes the prices of everyday items to go up, but wages usually don’t keep pace with Inflation. Low-income households have less purchasing power and spend more of their income on basic needs. During high Inflation, they even struggle to afford daily necessities. In extreme cases, Inflation can lead to poverty and social unrest.

Since Inflation is an increase in the prices of goods and services, it increases the Cost of living, making grocery, housing, and gas prices more expensive. When Inflation is high, disposable incomes are eroded, and people have less money to spend on other things.

The interest rate hike by the Federal Government as a part of monetary policy to combat Inflation can hurt the low-income group. The recent interest rate hike by the central bank to combat inflation hurt the low-income group the most as they had to pay more for necessities.

The Cost of living will increase, and they will have to spend more on essential items such as food and transportation. This can lead to financial hardship for many low-income families.

Inflation rate in the Second quarter of 2022

The US inflation rate slowed more than expected to 8.5% in July of 2022 from an over 40-year high of 9.1% in June – the second quarter of 2022, reported by the Bureau of labor statistics. 

The CPI – Consumer Price Index remained unchanged after reaching a 17-year high of 1.3% and lower than expected at 0.2%. Core inflation remained at 5.9%%.

The consecutive quarterly decline in GDP in mid-2022 also indicates lower production and the deteriorating purchasing power of consumers in America.

So, what do these numbers mean for us? The inflation rate and the CPI numbers are good sources of understanding the economic condition of a country and help you plan your finances more efficiently.

The trend and predictions from various analysts worldwide indicate that overall Inflation is in the upward direction till mid-2023, varying from quarter to quarter.

Corrective Measures to manage the rising Cost of living during Inflation

While Inflation is a sign of a healthy economy, it can damper personal finances if you don’t have a plan to manage the rising Cost of living. It’s time to plan for your money, as you’re feeling the pinch right now, and the level of sacrifice you have to make in the short term will help you manage your money better in the long run.

Many people start by considering changing jobs to one that pays better. If that’s not an option, focus on the most important things, cut back on unnecessary expenses, avoid charging your credit cards to buy luxury items, and ensure you have an emergency fund to cover unexpected costs.

The average American consumer spends an extra $240 per month on basic living expenses compared to a decade ago. Higher fuel prices, rising healthcare costs, and housing costs drive this increase. 

When Inflation is high, it can create a lot of stress on consumers because it makes everyday purchases more expensive. It can also cause businesses to cut back on production because they have higher expenses. It’s crucial to monitor Inflation closely and take action when necessary to prevent this from happening.

Wrapping up

In my final words, it is vital to take care of our financial health and focus on what we can control, such as budgeting, saving money for retirement, and making investment decisions wisely according to the economic condition.

Related articles:

10 Tips to Keep Your Portfolio Inflation-proof

The US Job report and Inflation data released: Is it time to invest in stocks now?

How to Save Money on Groceries amid Inflation?

Fed Rate Hike And Rising Inflation: What You Need To Know?

Frequently Asked Questions – FAQs

Q: How Is Inflation Measured?

The Consumer Price Index (CPI), which tracks the rise in the Cost of a basket of goods and services used by households, is the most widely recognized indicator of inflation. Inflation is measured by comparing the current prices of goods and services to previous prices.

Q: What Causes Inflation?

Increases in production costs, such as raw materials and wages, can increase the prices of goods and services, leading to inflation.

Q: What Is Hyperinflation?

When prices rise uncontrollably, it causes rapid and excessive price increases. The out-of-control increase in the price of goods and services is called hyperinflation. In a hyperinflation economy, prices rise rapidly, often reaching 50% or more per month.

Inflation and Cost of Living: The Top Two Money Problems for Americans right now.
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Inflation and Cost of Living: The Top Two Money Problems for Americans right now.
A 40-year high inflation rate in the second quarter of 2022 caused the cost of living to be more expensive for low-income households.
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