How to Budget for Inflation

Economists argue about the exact causes of inflation, but for the consumer the bottom line is simple. Prices go up and your paycheck buys less today than it did last month or last year. But you aren’t helpless. Do what governments and corporations do: factor inflation into your budget and financial planning. You might even be able to turn inflation to your advantage.

Educate yourself about inflation. The U.S. Bureau of Labor Statistics provides up-to-date inflation statistics and the Federal Reserve publishes inflation forecasts. Suppose last year your household budget was $2,500 per month, excluding fixed-rate loans and mortgages. Now suppose inflation was 1.7 percent last year but the forecast is 3 percent for next year. To be on the safe side, use the higher rate for budgeting. Add 3 percent, or $75, to your monthly budget. If your salary isn’t keeping up with inflation, at least you will know how much to cut expenses and you can change spending habits to achieve your budgetary goal.

Talk to a financial advisor about fixed-rate financing. As a general rule, when inflation goes up, so do interest rates, and so does the interest on variable interest mortgages and credit cards. Fixed rates for debts help to minimize the impact of inflation. Plus, as prices rise over time, a fixed-rate mortgage means your housing costs will become relatively cheaper year after year for the life of the mortgage. On the investment side, consider shifting more of your portfolio into inflation-resistant stocks. Examples include companies with large market shares that allow them to set prices, as well as companies with access to low-cost raw materials.