To beat creeping consumer costs, you have to adjust your household habits
We've all been so focused on whether we are officially in a recession that we may not have paid enough attention to the creeping threat of inflation. The Federal Reserve recently decided to keep its target for the federal funds rate at 2 percent, partly because of concerns about inflation.
Inflation, simply put, erodes the purchasing power of your dollar. Talk to anyone who had to pay for gas, groceries, or any goods in the 1970s and they'll tell you how hard inflation can be. I recall my grandmother piling us in the car before dawn to get in line to buy gas.
Federal Reserve chairman Ben Bernanke also remembers that time, as he recounted in a speech to graduating seniors at Harvard University in June. "Then, as now, we were experiencing a serious oil price shock, sharply rising prices for food, and other commodities, and subpar economic growth," Bernanke said.
The economy had just gone through a severe recession, during which output, income, and employment fell sharply and the unemployment rate rose to 9 percent, Bernanke said. Consumer price inflation, which had been around 3 to 4 percent earlier in the decade, climbed to more than 10 percent. Bernanke doesn't think we're headed for a similar slide. The overall inflation rate has averaged about 3.5 percent over the past four quarters. It is significantly larger than he would like but not as disturbing as in the mid-1970s.
"Today's situation differs from that of 33 years ago in large part because our economy and society have become much more flexible and able to adapt to difficult situations and new challenges," he said.
We might not get to a double-digit inflation rate but the rate of inflation is hurting families already struggling to make ends meet. So what does a family do when they've been setting aside, say, $100 a month for gas and now it costs $300 or $400? How can you budget when prices keep rising, but your income is flat?
If you haven't already moved toward becoming more energy efficient, you won't make your budget work in an inflationary environment. Drive slower. Use less of your air conditioner. Walk through your home and see what you can do to make it more energy efficient. I started charging my kids $1 every time a light was left on after they exited a room.
Start shopping smarter by switching to store brands. Bend down. Often the less costly items are on the low shelves.
If you're worried about inflation eroding the buying power of your investment dollars, consider putting some of your money in two inflation-indexed securities offered by the US Treasury: Treasury Inflation-Protected Securities and I Bonds. Both are designed for investors who want inflation protection and a guaranteed rate of return on their principal.
I know the economic whipsaw we're in is so frustrating. But you have to do more than fret. The key to beat inflation is to do what Bernanke says. You have to be flexible with your finances. Stop talking about cutting costs and do it - now.
Michelle Singletary is a columnist for The Washington Post. She can be reached at singletarym@washpost.com.
