Can I Afford to Live Like Last Year?

Inflation means your money is now worth less.

If you've been paying attention to the news lately, or checking out all the latest personal finance happenings here at The Ascent, you've heard a lot about inflation. Visits to the grocery store or the gas station can tell you a lot about rising prices, and you're likely getting familiar with watching your hard-earned money not go as far as it used to. And there's credible evidence that a recession may be on the horizon.

The U.S. Bureau of Labor Statistics (BLS) released its Consumer Price Index (CPI) report in May, with an overall finding that the last year saw an inflation rate of 8.6%, the largest 12-month increase since December 1981. So if you're under the age of 40 or so (as I am), this has been the highest rate of inflation in your lifetime. But the biggest question on your mind amidst all the bleak news and higher prices might just be: Can I afford to live (and spend) like I did in 2021? If you're like most average Americans, the answer is probably not.

Surging prices

The Consumer Price Index report by the BLS indicates that while costs were up across the board, there are a few areas where the increases were more noticeable. Many of them also have a larger impact on the rate of inflation overall, as it is weighted more heavily on the cost of food, energy, and shelter (these reflect 54% of the CPI). Note that all of them can have an impact on the average American's wallet.

Housing

We all need a place to live, and when shelter costs have gone up 5.5% over the previous year (and 0.6% in the month prior to the report), it can be hard to keep that roof over your head. Rents are up, as are mortgage rates, making it even more difficult for those trying to buy homes to break into the already overheated and undersupplied housing market.

Transportation

The price of new cars increased 12.6% from the previous year, while used vehicles are up 16.1% over the same period. Now is a bad time to need a new (or new-to-you) vehicle, and a good time to repair and maintain the vehicle you already have.

Energy

Energy costs are on the rise overall (with an annual gain from May 2021 to May 2022 of 34.6%), and this includes the cost of gasoline along with fuel oil and propane. Gasoline is of particular note here as an increasing expense for the average American. As of this writing, gasoline is sitting at an average cost of $4.80 per gallon, according to AAA.

Food

You have likely noticed higher prices at the grocery store lately -- I know I sure have. The CPI tracks increases for both food at home (grocery purchases) and food away from home (restaurant purchases). Food at home is up 11.9% for the year, while food away from home saw an increase of 7.4% over that same year. These spikes are the highest since April 1979 (food at home) and November 1981 (food away from home).

How do you get by under these conditions?

While none of this is good news, there are a few ways to help mitigate inflation's impact on your wallet.

It's a great time to create a budget, if you haven't already. The best budgeting apps can help you find places where you can cut back on your expenses, allowing you to redistribute your income so you can cover your bills, put money into your savings, and still manage to spend a little money on the fun things that make all your hard work worth it.

If you can add more income to your household, perhaps by asking for a raise at work, finding a higher-paying job, or adding on a side hustle, now is also an excellent time for that. Even if your side gig ends up being a temporary fix to get you through this time of higher consumer prices, it will still give you resume fodder for the future and more money for now.

And finally, now is a great time to pay off your debt. Credit card interest rates are variable, and the sooner you can get out from under credit card debt, the more of your money you can stash away in your savings account.

These are scary times, and it can be hard to stay optimistic. By assessing your income and spending and taking steps to increase the first and decrease the second, you can rest easier knowing that you're more financially secure as we head into an uncertain future.