(NerdWallet) – Rising prices (aka inflation) are everywhere you look – on the news, at the pump, and at the grocery store. We notice these changes when we reach for our wallets, but it’s hard to grasp what an extra dollar here or several dollars there means over several weeks, months, or an entire year.
With prices up 8.5% year over year, household spending, meaning yours and mine, is expected to increase by several thousand dollars. Even with the Federal Reserve’s attempts to control inflation by raising interest rates, these prices are unlikely to fall dramatically. This climb isn’t just a tank of gas or a few extra bucks at the store. For some people, that might be an entire paycheck each month.
Using annual inflation and spending data from the US Bureau of Labor Statistics, we’ve looked at how spending in 2022 will differ from 2020, the last full year when inflation was relatively stable. We’ve chosen a handful of categories that many, if not most, Americans spend money on, such as food and electricity. The inflationary impact is remarkable.
Household spending could increase by $11,500
Throughout 2020, US households spent an average of $61,300. This number includes everything we spend our money on: housing, food, entertainment, clothing, transportation and everything in between. In 2022, it will reach $72,900, a difference of more than $11,500 if consumers want to maintain the same standard of living. Keep in mind that this is an average, a number that represents an approximation for all Americans, but is accurate for very few. Those who earn (and therefore spend) more will see more dramatic dollar increases. Those earning less may see less dramatic dollar jumps, but the impact of these rising prices could be felt more significantly.
It’s worth remembering – spending was a bit unusual in 2020. People spent less on travel, childcare and entertainment, for example, and more on home improvements. It’s a safe assumption that people will spend less in certain categories this year as well, if only to avoid high prices. This is mainly the reason why we believe that spending in 2022 will be more similar to that of 2020 than to that of 2019, for example, another year for which such spending data was available.
We can probably all agree that $11,500 is a lot more money to spend in a single year, but it can be hard to understand what such numbers mean in practice. Per month, you’re looking at nearly $1,000 more. For many people, it’s a rent supplement or a mortgage payment.
Of all the expense categories we looked at, groceries, housing, and gas are growing the most. Throughout 2022, if inflation does not slow significantly, we can expect to spend an additional $1,200, $1,400, and $2,500 respectively in these categories.
Click here for a table of all planned spending changes.
How this situation plays out in the recession conversation
The Fed is trying to bring prices down smoothly. By raising the interest rate at which banks borrow money, he can control demand in the economy, and with lower demand, prices fall. However, these changes can also trigger smaller effects such as higher unemployment and an excessive slowdown in the economy. It’s a balancing act.
Although a recession may seem scary (and it is deep), a downturn may be necessary to bring prices under control. And as hard as it is to digest, that part is a good thing.
How to deal with high prices and talk of recession
Look at the big picture
As explained above, there is a silver lining to an economic downturn or recession – prices fall. While the Fed attempts to achieve this outcome with minimal negative impact, scrolling through news websites and listening to oversimplified social media shots will do absolutely nothing to protect you. Keep calm. Bolster your emergency savings if you can, see if you can tighten your budget and sit down. Even when it comes to your long-term investments, sometimes the best advice is to relax and do nothing.
Expect to see the effects of rising rates
If you are planning to buy a house or a car in the near future, expect to pay a lot more for these items if you take out a loan. Banks and creditors are passing on their increased Fed rates to you, the consumer. Monthly payments will be larger (perhaps several hundred dollars) due to higher prices and higher interest.
Don’t forget the credit cards — interest rates will go up here too. Now more than ever, do your best to settle your balances each month. The compound interest of credit card debt is already high enough to try to avoid it, when possible.
Budget more for necessary goods and services, temporarily
Reviewing your budget in the current climate doesn’t just involve cutting things, but figuring out how to accommodate extra spending in certain categories. After all, you can’t live without things like groceries. In order to maintain the same volume of groceries you had last year or the year before, you will need to find the extra money. If you didn’t have much wiggle room in your budget to begin with, think about what items you can do without or cut back on. Maybe you can get another year out of that winter coat or cut a streaming service or two. Presenting them as temporary sacrifices facilitates their loss.
Some category definitions differ slightly from the Bureau of Labor Statistics Consumer Price Index to the Consumer Expenditure Survey. Care was taken to select the most comparable categories when exact matches were not available. For example, the CES measure for gasoline includes motor oil while the CPI does not.
Spending is based on CES 2020, the latest year for which this spending data is available. The 12-month inflation rate began its rise in April 2021, so comparing baseline spending from 2020 to 2022 will better capture the effects of rising prices.
Spending estimates for August to December 2022 are based on CPI data available through July 2022, averaging monthly changes over the first seven months of the year to arrive at a conservative estimate for the rest of the year.
Monthly expenses are based on an average flat rate throughout the year rather than estimated expenses (with seasonal fluctuations) from month to month.
Consumer price indices were not available for the ‘household activities’ category for the months of December 2021 to March 2022 and July 2022.
Expenditure data comes from the Consumer Expenditure Survey and is based on questions asked to households for the year 2020. When many people answer $0 for a single expenditure/survey category, the data are skewed and the average amount seems low. The categories selected in this analysis were chosen with this in mind, and they represent the categories in which most people spend money. This survey is asked of “consumption units”, not of individuals. This means, in most cases, that expenses are attributed to a single person in the household, regardless of the number of adults present.
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