AMES, Iowa – Many families have noticed that the items they buy on a day-to-day basis have gradually increased in price over the past year. This tendency of prices to rise over time is called inflation and it means that the buying power of your money is decreasing, according to Carol Ehlers, a human sciences specialist with Iowa State University Extension and Outreach.
“As inflation continues, each family needs to keep an eye on how inflation is affecting their cost of living. Going over your budget, or building one, with an ‘inflation fighter’ adjustment is a key strategy,” said Ehlers, who specializes in family wellbeing.
The Consumer Price Index measures the change in prices paid by urban consumers for goods and services. According to the Bureau of Labor Statistics, the December 2021 CPI rose by 7% over the past 12 months — the largest 12-month increase in 40 years. This index measures the average change over time in the cost of food, housing, gasoline, utilities, household items, and other goods or services.
Review or build your budget using the CPI Inflation Calculator
“You can use The Consumer Price Index Inflation Calculator to help you build your personal inflation fighter budget. It’s a valuable tool to better understand the current and future impact of inflation,” Ehlers said.
Consider the Bureau of Labor Statistics example of a Midwest household of three whose basic budget in 2020 included monthly family expenses of $4,982 ($59,784 annually). Plugging the monthly amount of $4,982 into the CPI Inflation Calculator shows a loss of consumer buying power from December 2020 to December 2021. The goods and services purchased in December 2020 for $4,982 cost $5,332 in December 2021. Due to inflation, the family would spend an additional $350 in December 2021 to pay for the same goods and services.
“To get a sense of how inflation may be impacting your family’s buying power, put your personal 2021 monthly spending numbers into the CPI Inflation Calculator. It will show you the dollar amount that you could plan for in your 2022 inflation fighter budget,” Ehlers said.
The average Midwest family of three in the Bureau of Labor Statistics example needed $350 more per month to meet their expenses. If the income for the family does not increase by $350 per month ($4,200 annually), the family will have less buying power and may feel like they’ve had a pay cut.
“This is really harmful for people on fixed incomes. Higher prices mean families need to be more strategic about their spending and find ways to stretch their income. Budgeting for periods of higher inflation challenges families to rethink the way they spend and determine which expenses they potentially can reduce or eliminate,” Ehlers said.
Cutting expenses to counteract inflation
Each family needs to decide what changes to make to their inflation fighter budget. While the rising cost of food is more noticeable, it only accounts for about 13% of total household spending, according to the Bureau of Labor Statistics.
“Instead give attention to cutting spending for larger expense categories like housing and transportation or categories like recreation or internet,” Ehlers said.
The Consumer Financial Protection Bureau’s “Cutting Expenses Tool” provides tested strategies to decrease expenses for fighting inflation.
Get one-on-one help building your inflation fighter budget
Establish an inflation fighter budget with some help. Free financial education consultations are available to all Iowa residents from ISU Extension and Outreach’s human sciences specialists. Contact Iowa Concern at 800-447-1985 and ask for free financial education consultations.
Find family finance information at ISU Extension and Outreach’s MoneyTip$ blog.
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