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How to Save Your Budget With Inflation Running Hot

By Claire Ballentine and Charlie Wells

Surging inflation showed little sign of abating last month, indicating that grocery bills will keep going up, markets will remain volatile and investors will continue to feel pain in their 401(k)s.

Photo by Tima Miroshnichenko from Pexels

“As inflation has broadened, it’s going to be much more difficult to do an inflation dodge,” said Nela Richardson, chief economist at ADP. “It’s unlikely that prices are going to go down. The best we can hope for is a rapid deceleration of price increases.”

But there are strategies consumers can deploy to lessen the pain. Here’s advice from financial advisers and market experts on how to navigate the latest inflation numbers:

Focus on What You Can Control

A common — and commonly derided — tip for dealing with inflation is to tell people to simply consume less. Politicians and companies that have made such suggestions over the past few months have been lambasted by critics as being out of touch. 

While cutting back might make sense sense in theory, it’s much more difficult in practice to reduce spending on essentials like food or energy, which saw prices surge 9.4% and 30.3% year-over-year, respectively. 

“For most folks, it’s not reasonable to ask them to not use those things. They’re everyday necessities,” said Ross Mayfield, an investment strategy analyst at Robert W. Baird & Co.

Consumers are more likely to find some wiggle room if they look at their finances as either “needs” or “wants,” Mayfield said. The former category will be hard to cut down, but the latter could be fruitful. You can control “wants,” such as leisure activities or eating out at restaurants.

Trade Sideways Where Possible

Aside from spending less, consumers are often advised to “trade down” during inflationary periods, buying cheaper products of lesser quality. But advisers say trading sideways — substituting goods or services of similar quality that have been less affected by inflationary forces — could mean saving money without sacrificing as much. 

This involves looking at the different rates of inflation on similar goods and services.

Consider recreation. Airfare and lodging prices are surging right now, Mayfield said, but sporting goods, video and audio products haven’t climbed as high. Swapping travel for at-home or local recreation may be one way to save without completely cutting experiences, he said.

In fact, airfare prices rose more than any other category in April, up a whopping 18.6% from just one month earlier. Yet the price of admission to sporting events slumped 8.2% and movie tickets rose just 1.1%.

Nick Holeman, director of financial planning at roboadviser Betterment, said a similar phenomenon is happening in the grocery store. The latest numbers showed bacon is up 16.3% from last year, compared to just 8.8% for ham. Citrus fruits notched an 18.6% gain, while apples are only 6.6% more expensive and bananas are up just 4.2%. Substitutions may mean savings without too much sacrifice. 

Look Beyond the Average

As inflation has remained stubbornly high, consumer confidence has waned. But it’s important to remember that even if the headline rate remains high, your own personal experience may be different. 

That’s because the primary measure of inflation, known as the consumer price index, is a weighted average of price changes in a “basket” of consumer goods and services. On the whole, those prices are increasing at the fastest level since the 1980s. But if your consumption patterns don’t match that standard basket, your level of inflation might not be quite so bad. 

Even drilling down into the data, core CPI — which strips out volatile food and energy prices — rose by at a slightly less eye-watering pace of 6.2% year-over-year. That means costs for clothes, medical services and even alcohol aren’t rising as fast in aggregate as that topline number. 

Advisers recommend taking a look at your own balance sheet to determine where your spending may be increasing. 

“Everyone has their own personal inflation,” said Mayfield. “If you spend 50% of your income on your fixed mortgage, your inflation rate is much lower than the broad average, so maybe you have more wiggle room.” 

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