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Part 1: The 3 I's and Your Budget

Welcome to Part 1 of the 3 I's and your budget! This post is talking Inflation!

It's probably safe to say that every household has been affected by inflation to some degree in the last few years. The word has been on repeat. The news is constantly talking about it. What I haven't heard the news talk about is the Silent Depression. What that means is there are a lot of families truly struggling right now, despite the news being mostly favorable about the economy. This Silent Depression is being heavily driven by inflation. Wage growth has not kept up with inflation which means people's budget doesn't have the same purchasing power that it once did.

What exactly is inflation? The definition from Investopedia is: "Inflation is a rise in prices, which can be translated as the decline of purchasing power over time. The rate at which purchasing power drops can be reflected in the average price increase of a basket of selected goods and services over some period of time. The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods."

The reported inflation percentage is based on the Consumer Price Index (CPI) which "is a measure of the average change over time in the prices paid by urban consumers for a representative basket of consumer goods and services." (U.S. Bureau of Labor Statistics) The news has been getting more positive in regards to the inflation percentage, despite many families still struggling. Why aren't families feeling more relief?

This is where the difference between headline and core inflation comes in. The news talks about inflation in regards to the Federal Reserve's targets. This is almost always based on core inflation, not headline inflation. Remember that basket of goods mentioned above? When calculating headline inflation, that basket includes the categories of housing, transportation, medical, electronics, food, and energy. However, core inflation does not include the categories of food and energy; the most volatile ones! Wow, right?

Headline inflation is more in line with cost of living increases. While headline inflation is coming down, it spiked at a much higher level in 2022 than core inflation and that greatly affected many families ability to stay within their budget. It is generally recommended that 10-15% of your budget be allocated towards groceries. We all have to eat but when eggs cost $8, the grocery budget gets blown and something else has to give. What gives? Savings, debt payments, etc.

So, if you felt a bigger impact from inflation than the news suggested you should, it's most likely because you were being greatly impacted by the food and/or energy categories that weren't in that reported inflation percentage. The good news is that headline inflation has slowed. The bad news is that inflation is still high and people are having a hard time getting caught up. This is where the importance of the budget comes into play and making sure every dollar is allocated with intention. If you know you need to allocate more towards groceries because you have teenage boys, then you have to make a plan to either spend less in another category or find another source of income (we will talk about this I later).

Need some budgeting tips? Check out my blog post and podcast, Top 10 Budgeting Tips.

Information contained in this post is for educational purposes only and is not considered financial advice.


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