how to deal with Inflation?

Inflation. We all deal with it on a daily basis. We bet even the word itself makes you cringe.

Since it’s a sticky topic, very few people have an accurate idea of what it really is, how to deal with inflation, and how it can affect your finances.

Here, you get to learn about inflation in easy terms. So, next time you run to the grocery store and balk at the price of milk, you’ll know exactly:

what is inflation?
why is the price of everything soaring?
what does this mean for your wallet?

And how to soften the impact (and protect your money from inflation).

Plus, we share everything you need to know about inflation in the same way we cover topics like money, investing, and how to pay off debt at Penny – less lingo, more real words. ;)

Let’s get to it!

👀 5min read

what is inflation

📸: Pinterest

What is inflation?

Inflation is a general or persistent increase in prices.

It’s easier to notice the effect of inflation in day-to-day goods, like gas or groceries. A pound of strawberries you bought 2 years ago for $1, may cost $2 today.

There are 3 reasons for inflation: demand-pull, cost-push, and built-in inflation.

Demand-Pull = aka. more people want it (aka demand it!), but there’s less to go around. Like 2 years ago, when everyone hoarded toilet paper and it was sold out.
Cost-Push = aka. the cost is pushed to your wallet. If production, shipping, etc. increases, everything else does too. Packaging for snacks costs more now? Your favorite chips will also cost more.
Built-in Inflation = aka. as the name suggests, it’s “built-in” or “expected” inflation. You probably expect to get a raise at work, in the same way you can expect rent to increase, year after year.

Of course, ask an Econ professor and they’ll give you A LOT more detail. But this is the gist of it. And we like to keep things simple. (Curious? Get to know Penny here.)

Why is this happening now?

Ahh… This question is trickier to answer!

First, it’s important to note: inflation always “happens”. Some years it’s higher, others it’s lower. In 2022, inflation is VERY high. Which is why it’s raising so many eyebrows.

Why is inflation so high in 2022?

The short answer is: cost + demand VS. supply. We’ll explain.

First, COVID-19. The pandemic stopped the world in its tracks. Literally. Airlines, ships, trains; global supply chains suffered. Companies had a hard time trying to find and ship their goods to consumers like us. The result? There’s less to go around. If you want a new IKEA shelf, better get ready to wait 6-12 months. Or pay up to twice the amount for oranges from South America. And so on.
Then, “free money”. Another unexpected COVID effect: people had more money in their pockets. Some, as a result of staying home and saving money (#quarantine). Others, thanks to economic relief efforts, like better unemployment benefits, stimulus checks, and debt forgiveness.
Finally, war is expensive. And disruptive AF. There are MANY systems that are still being disrupted due to Russia’s invasion of Ukraine, and other worldwide conflicts.

Put this all together into a financial Crockpot, and what do you get?

The demand for goods (like groceries) is very high. We also have money to buy more (and more expensive) items, since we now have some extra cash in our pockets.

The supply is (still) very low. The impact of COVID and war still runs deep. From our local grocery store. To the chips on our cellphones. (Forget the IKEA shelf. #RIP)

So, prices increase – aka, inflation rises. And we get? Expensive slow-cooked stew. (LOL)

How does inflation impact me?

In general, the government and powers-that-be do their best to ensure inflation stays at a low, consistent, and reasonable rate.

Why?

In economic speak:

So you have purchasing power (aka the ability to buy something) with a living wage (aka the base income you need to live comfortably).

In normal words:

So you can afford to go grocery shopping, and feed yourself and your family without going broke.

Remember the strawberries you bought for $1 in the first section of this blog post?

If it costs you $2 now, the extra dollar may not seem like much – but apply that to every item on your grocery bill, and all of a sudden you get something that’s $20, $50, even $80 more.

Here's one way to save on that grocery bill! (offer ends Oct 12th 2022)

Since it costs you so much MORE to buy 1 thing, your money loses its VALUE.

That is, hands-down, the biggest impact to your wallet. If your money has less value, your ability to buy things decreases. You’d likely still afford the extra strawberries.

But bye-bye new Adidas.

Which is why you gotta know how to deal with inflation (and protect your money).

How to deal with inflation?

Here are 3 of the best ways you can deal with inflation today:

Invest, invest, invest.

Yes, it’s counter-intuitive. But investing can help protect your money from inflation’s ebbs and flows. And paired with a possible 2022 recession? Right now is one of the BEST times to learn how to invest, and keep your wallet safe.

Read more about how to invest for the 1st time here.

Use cash rewards credit cards.

Do you own a credit card? What are your credit card’s rewards and benefits? This is also an excellent time to reassess, and switch your credit card to one with a cash rewards or cash-back feature. Travel, points, and others count too.

Read more about credit cards, debt, and budgeting here and here.

Move your savings into a High-Yield Savings account.

If you have money saved, move it into a high-yield or high-interest account – you’ll get a better rate, and better protect your money from inflation. And rest easy: as long as the bank or financial institution you choose is FDIC insured, your money is safe. Find one you’re comfortable with, move it, and rest easy knowing your money is working for you!

Read more about how much money you really need here.

The takeaway?

Inflation can feel like a gray cloud looming over your head. When you know how to deal with inflation, and you know your money is safe – that cloud is guaranteed to melt away.

And If you’re ready to dissipate other money clouds? Start sprinkling a dose of sunshine on topics like debt, investing, and financial freedom by joining the Penny community!

Penny provides financial advice for women with a lingo-free approach. Our goal is to make all things “money” less confusing, and easier to digest, so you can soak it all up and embrace the financial pro you were born to be.

Ready to make smart money moves? Start with the money maker quiz