How will inflation hit my wallet this year?

Inflation is a harsh reality of the economy. It happened in the past and will happen in the future too. When inflation happens, every individual has to pay more for goods or services that they need on a daily basis.




Inflation is a pretty big topic and has been the center of attention to economists for decades. There has been a lot of research and theories about it but it is still hard to predict. In this article, we will talk about inflation and how it might affect your wallet this year.


What is inflation anyway?


Before we begin digging deep into the topic, let's learn more about what inflation actually is. Inflation is defined as a rise in the prices of goods and services over time. This means that if you go to buy food, clothes, or other household items, they are more expensive this year compared to last year.


In simple words, inflation is a rise in the general price level of goods and services over time. This means that there was a less supply of goods available last year compared to this year so their prices went up to match the increased demand. Similarly, if there is a very high supply of goods or services, then inflation will go down as the price levels drop too.


What causes inflation?


Inflation is mostly caused by too much money in an economy. More supply of money leads to higher prices as more people demand the same number of goods and services. When more money flows into an economy, increased spending leads to higher demand for goods and services.


For example, if there is a sudden increase in demand for new cars because everyone has lots of cash to spend, then the car dealers will also raise their prices. This means that inflation can be caused by printing too much money or having access to too much money.


Historical data on inflation


Now when it comes to the history of inflation in the US, there have been some ups and downs. The highest ever recorded level was 23.70 percent in June of 1920 while the lowest level ever recorded was -15.80 percent in June of 1921. A lot can change when it comes to inflation because this is all about supply and demand after all, so anything can affect it. The average inflation level of the U.S. was 3.47 percent from 1914 to 2021.


As you can tell by the historical data, inflation has a tendency to go up and down. What we can notice from this data though, is that inflation peaked during the first and second world wars as many goods were scarce at those times which led to a shortage of supplies.


How high will inflation go this year?


This is an interesting question with no real answer. The thing about inflation is that it cannot be predicted accurately because the causes are always different. It all depends on what will happen in the economy during this year. If the economy goes into a recession, then we will definitely see an increase in inflation as the money supply is limited and many people want goods or services which become more expensive. But if the economy grows this year and there is no economic crisis at all, then you can expect lower levels of inflation since supplies and demand stay stable.


In the last two years due to Covid-19, inflation has been a little higher than normal. At the end of 2021, another variant of the virus was found named Omicron. At the beginning of 2022, the Omicron variant is spreading pretty fast and it might cause a pretty big problem for the world economy. This means that there will be even fewer goods available this year compared to 2020-21, which can cause prices of goods and services to rise. But it's just the beginning of 2022. If things get better later this year, the inflation level will definitely stay lower. And if not, then we might see even higher levels of inflation.


How will it affect food, gas, durable goods prices?


It will depend on the situation of inflation this year. If it is higher than usual, then you can expect prices to rise in all categories. But if things are fine, then you can expect no real changes when it comes to these items. It will vary depending on the place where you live as well because inflation is quite different in each region. For example, it might be much better to live somewhere else than in South Dakota which had the highest levels of inflation across the US during this year.


How will it affect the middle class?


Everyone will be affected by inflation. It does not discriminate between rich and poor, or old and young. However, the truth is that inflation might affect people in different ways. For example, if you are on a fixed income then your income might stay the same but prices of everything around you will go up which means that you might struggle more to get by. On the other hand, if you are on a variable income then you will be fine but your employer might not be doing so well which means that they can limit your benefits or even cut down employment levels.


Conclusion:


Rising inflation, hard to predict and even harder to budget around, is here to stay for the foreseeable future. The best course of action is to budget for the worse and plan to cut out a few large purchases. It is best to play it safe, especially when your money is losing every penny of buyer power.