If there’s one word that has caught everyone’s attention in 2022, it’s inflation.
While recent signs suggest the worst may be behind us, inflation is still a major concern for ordinary Americans and the Federal Reserve. And experts say it’ll likely be a couple of years before prices really come down from the highs they’ve seen this year.
October inflation data showed that high prices eased for the month, up 7.7% year-over-year, less than analysts had expected. It’s the first sign of a major inflation drop since spring 2022. The most recent jobs report was strong, but this only adds to the complexity. Many economists say low unemployment threatens to keep inflation high, which means more aggressive rate hikes from the Fed could come.
“Even with the likelihood that inflation has peaked, inflation will still remain elevated for some time, as supply chain issues persist and there is still plenty of instability with the Ukraine war, which has caused significant swings in energy prices,” says Zach Stein, chief investment officer at Carbon Collective, an investment advisory firm.
Experts say that we’ll need more than one month of lower-than-expected inflation numbers before the Fed can slow down on further interest rate hikes. And all the while, many Americans are concerned a major recession is already well underway after months of high inflation, and rising interest rates.
Economists say it’s too early to tell if we are in a true recession, but the technical definition of a recession is of little concern to Americans who continue to deal with soaring prices. So we asked several experts how long the soaring inflation might last and what people can do to mitigate the impact on their finances.
When Will High Inflation Go Down?
Whether or not the U.S. has passed peak inflation remains a big question with no clear answer among economists. Prices have begun to decline in some of the most stubborn sectors, such as gas, apparel, and used cars, which is a good sign that inflation has peaked. But the truth is no one can predict what’s ahead. With so many factors at play — such as the Fed’s interest rate hikes, the strength of the dollar, and the war in Ukraine — it’s complicated, to say the least.
Why Inflation and High Prices Will Likely Stick Around a While
Economists and financial experts agree on one thing: Higher prices will likely last well into next year, if not longer. And that means Americans will continue to feel the pain of higher prices for the foreseeable future.
“It still may take a couple of years, but as we see supply chains finish adapting to these new realities and better balance supply with demand, I expect prices will likewise come down,” Stein says. The reasons we’ve seen such high inflation this past year, he adds, is because of clogged-up supply chains from the COVID-19 lockdowns and the invasion of Ukraine.
Like Stein, Robert Triest, department chair and professor of economics at Northeastern University, expects inflation to decrease over the next two years if the COVID-19 pandemic slows and the Russian war in Ukraine ends. Action taken by the Federal Reserve, which targets a 2% inflation rate by raising interest rates, also makes Triest more optimistic that inflation will come down in the next couple of years.
Preston Caldwell, head of U.S. economics at Morningstar, has a more granular view. He expects prices will stay high for the rest of 2022 but will fall dramatically in the next two to three years.
“While consensus has largely given up on the idea that inflation will be transitory, we still think most of the sources of today’s high inflation will abate (and even unwind in impact) over the next few years,” Caldwell says. “Combining these factors with tightening monetary policy, we expect inflation to undershoot 2% in 2023 and 2024.”
How to Deal With Inflation
Runaway inflation took a breather in October, but we’re far from declaring that the inflation crisis is over. Inflation has affected everyone in recent months, but you don’t have to sit idly by as your expenses keep growing.
There are steps to take and actions to avoid that can help you navigate this period of high inflation, for however long it lasts. Experts agree you can protect your money from inflation by going back to the basics:
Adjust Your Budget
Start by taking a hard look at your budget and your bills. Know what you’re spending your money on, how much you’re saving and investing, and look for areas where you can cut back. Recurring subscriptions, phone, internet, and even car insurance are examples of common bills that could be cut or reduced.
“Everyone is noticing how much everything costs. It means being more mindful about our spending,” says Larry Pon, a financial planner based in Redwood City, Calif.
There are also ways to get savvy with saving on essentials. For example, you can plan your meals further ahead and try to find recipes that use the same ingredients, so no food is going to waste and you can purchase cheaper items at the grocery store. You can also try to take advantage of coupons and cashback portals to save.
It all comes down to planning more carefully to manage your budget, Pon says.
“Before taking that long drive to a restaurant you really like, you might consider going to a similar restaurant that is closer,” he says. “Instead of buying expensive beef, purchase chicken instead.”
Increase Your Emergency Fund
If your money isn’t going as far right now because of inflation, it may also mean your emergency fund is too small. Experts generally recommend saving anywhere between three to six months’ worth of expenses, but that may not be enough these days.
Take this time to revisit your emergency fund — the pile of savings you keep socked away for unexpected expenses like a car repair, hospital visit, or job loss. Changes in life circumstances, like inflation, could necessitate a change in your savings, and it may make sense to increase your savings in your emergency fund if you can afford to. If you don’t have an emergency fund, establish a plan and look for ways to save even a few dollars each month for the future.
The stock markets are down this year, and that’s good news for longtime investors because everything is on sale. Stocks and index funds are cheaper than ever, and you can capitalize on that by investing. Historical data shows that the stock market always rises over time, so the short-term ups and downs shouldn’t matter as much if you have a diverse long-term investment plan.
A falling stock market or ballooning inflation can cause you to second-guess yourself, but investing the extra cash you have, outside of your emergency fund, is one of the best ways to keep up with or even outpace inflation. In other words, a dollar today can be worth more than a dollar tomorrow if you invest it properly. Experts generally recommend sticking to index funds since they offer a reliable and cost-effective way to build long-term wealth that’s suitable for nearly every investor.
If you have a savings goal you’re trying to achieve in one to five years, an inflation-protected Series I savings bond could be a solid short-term investment. With a 9.62% yield, Series I savings bonds are considered one of the safest investments out there.
Don’t Take on More Debt Than You Can Afford
As rent, fuel, and grocery costs rise, more people are turning to debt to cover their costs. Credit card debt has been rising since April 2021 and is currently up by more than 15% from a year earlier, marking the largest increase in more than 10 years. At the same time, interest rates are rising, and borrowing money is becoming more expensive.
“As Americans survive off ‘borrowed’ money, personal finances continue to be a significant source of stress for many consumers,” says Natalia Brown, chief operations officer at National Debt Relief, a debt settlement company. “With the heavy shopping seasons upon us including back to school and the upcoming holidays, we can only expect debt will continue to grow.”
The best way to avoid high-interest debt, which is typically in the form of a credit card, is to charge only what you can afford to pay off and pay your balance in full and on time each month when your statement is due. Most importantly, prioritize building your emergency fund so you can be better prepared for unexpected expenses without turning to credit cards or other forms of high-interest debt.