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Should you change your spending habits because of inflation?

Here's what consumers should know about inflation and rising interest rates.

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When you fill up your car's gas tank or when you're shopping for groceries, you've likely noticed increased prices for all types of goods and services you've been purchasing. From May 2021 to May 2022, the Bureau of Labor Statistics reported a 8.6% increase in the Consumer Price Index (CPI), the highest year-over-year inflation in over 40 years.

The CPI measures the weighted average of prices of a basket of goods and services for consumers. In other words, it measures how far your money goes when purchasing services and items like groceries, gas, utilities, healthcare, automobiles and more. 

While inflation remained low in the early days of the pandemic, the recent increase in prices is a result of various demand and supply-side factors. 

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During the pandemic many found themselves flush with cash because of reduced spending, due to Covid-19 restrictions, and multiple stimulus checks. On the supply-side, gas prices increased, there were shortages in key materials like microchips and semiconductors and there were supply chain issues as factories faced shipping, transportation and labor problems.

These factors led to consumers spending more and businesses increasing their prices because of increased demand and reduced supply. While the Federal Reserve initially claimed that inflation was transitory, Fed chairman Jerome Powell recently said that it was time to "retire" the word.

The Fed recently announced further interest rate hikes to help combat inflation. Interest rates have hovered near-zero since the start of the pandemic. Increasing interest rates mean it's more expensive for consumers to borrow money, whether that be for a credit card, mortgage or college.

With increasing interest rates and rising inflation, should consumers change their spending or borrowing habits in this new economic environment? If so, what purchases should consumers scale back on? 

Select spoke to Barbara Ginty, CFP® and host of the Future Rich podcast, about what increased interest rates and inflation could mean for people buying everything from a home to groceries. 

What shouldn't you buy because of inflation?

Avoiding the effects of inflation might be impossible, but it's important to know where it's having the largest impact, so you know what categories of spending you may want to scale back on. While you might be feeling the squeeze when it comes to buying everything, inflation hasn't impacted all categories of goods and services equally. 

Gasoline and cars (both new and used) have seen dramatic price increases. From November 2020 to November 2021, the average price of gasoline increased nearly 60%. In the same time period, prices for used cars increased more than 30% while the cost of a new vehicle rose by 11%. So if you're looking to purchase a car, you might want to hold off on buying one if you can. 

After new car sales dipped at the beginning of the pandemic, the price of new and used cars skyrocketed this year. As consumer demand for automobiles rebounded this year, car manufacturers struggled to keep up because of supply chain issues like chip shortages. When the cost of new cars increased, people turned to used cars, but the price of those shot up too.

If you absolutely need to purchase a new or used car, it's important to do your due diligence when doing research. New cars are being sold at thousands of dollars above the manufacturer's suggested retail price (MSRP), according to the WSJ

Consumers can use sites like Edmunds, Kelley Blue Book and Car Gurus to understand what price they should be paying for a car of a certain year, model or make. When buying a used car, your best bet is to purchase from a franchised car dealer that sells certified pre-owned vehicles. You might be coughing up more money upfront but these cars are typically inspected and offer warranties. 

CarFax is also a useful resource for used car shoppers: You can find out the history of a used car such as its accident history and its last reported mileage.

You might also consider renting or leasing a car until the prices dip again. If you already have a leased car, it might be a good time to give the car company a call and ask for an extension on the lease, says Ginty. 

The other major expense you might see an increase in the coming months is the cost of a home (and mortgage) or your rent. Purchasing a house is often seen as a hedge against inflation because as the cost of building a house increases — such as land, labor and materials — the value of existing real estate appreciates too. 

While housing prices initially dipped at the beginning of the pandemic, prices have increased as many sought homes in the suburbs or moved back into cities. With demand surging and a reduced supply of homes available for sale, home prices have risen nearly 20% from September 2020, year over year.

"The prospect of higher interest rates in 2022 is accelerating the decision for buyers in an otherwise slower season," George Ratiu, senior economist at Realtor.com, told CNBC. "However, the low number of homes for sale remains the principal challenge, stumping both existing homeowners looking for their next house and first-time buyers seeking a place to call their own."

As a homeowner, unlike renting, you can avoid the possibility of your landlord raising the price on you. And with rent prices going up, it might not be a bad time to buy: According to an Apartment List report, the national median cost of rent has risen more than 17% since January 2021. 

If you manage to secure a fixed-interest mortgage loan, you'll have a fixed monthly payment regardless of whether interest rates change. 

"So if you were looking to buy a house, it would be great to be able to lock in a 30-year fixed rate mortgage at these low interest rates because rates are going to go up," says Ginty.

While interest rates are forecasted to rise, rates aren't expected to increase substantially, so it likely won't have a large impact on mortgages. As of December 16, 2021, the average 30 year fixed rate mortgage was only 3.12%, according to data from Freddie Mac.

Lastly, you might be seeing a modest increase in prices when it comes to your grocery bill. The price of all groceries has increased 6.1% since November 2020, and the cost of meat, poultry and eggs has risen even more. 

If you're looking to cut costs at the grocery store you might consider lowering your meat consumption, especially on expensive cuts of beef like rib-eye and sirloin. You might opt for cheaper meats like ground turkey or chicken, or you can try swapping in vegetables or beans, depending on the recipe. 

A credit card with grocery rewards can help you save money on your daily spending too. With a grocery rewards credit card, you'll get higher rewards or cash-back rates for your grocery purchases. The Blue Cash Preferred® Card from American Express offers 6% cash back at U.S. supermarkets on up to $6,000 per year in purchases (then 1%). There's a $0 intro annual fee for the first year, then $95 (see rates and fees).

Bottom line

Whether you notice an increase in prices when buying a steak at the grocery store or a new house, inflation might stick around longer than once anticipated. Though inflation hasn't affected all spending categories equally, there are some purchases you might want to hold off on, like new and used cars, until prices decrease again. However, forecasted interest rate hikes and inflation could mean it's the right time for other purchases, like a house.

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

For rates and fees of the Blue Cash Preferred® Card from American Express, click here.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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