What causes inflation — and what you can do about it

Rearview shot of a young woman shopping at a grocery store
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Inflation rose 9.1% between June 2021 and June 2022, the highest increase in the last 40 years. 

Chances are you’re seeing the effects of those price hikes in everyday life when shopping for groceries, gas and other necessities. 

If you’re worried about how inflation might impact your wallet long-term, you’re not alone. According to a Pew Research study conducted in May, 70% of Americans say that inflation is one of the biggest problems the country faces. 

In this article, we dig into what inflation is, how long it could last and steps you could take to make your dollar stretch further.

What is inflation?

Inflation is the rise in price of goods and services across the market. The Consumer Price Index (CPI) is what's often used to measure the change in how much goods cost over time. 

You would need $10,000 today to buy what $8,953.01 could buy three years ago.

As inflation rises, our purchasing power decreases, and our dollar doesn't go as far. For example, you would need $10,000 today to buy what $8,953.01 could buy three years ago.

If wages don't increase with inflation, it becomes harder to pay for everyday expenses, which is what many Americans are now experiencing. According to a Capital One Insights Center survey, just 18% of consumers feel their pay is keeping up with their cost of living. 

In February, 26% said they missed at least one bill the month prior, and 27% said they borrowed money to pay.

These numbers paint a bleak picture, but inflation isn't always bad. A certain level of inflation is a sign of a growing economy, and the Federal Reserve aims to keep inflation at around 2%. 

When inflation rises too rapidly, consumers and businesses can run into financial trouble, and it's the Federal Reserve's job to create a monetary policy that keeps inflation in check and the economy stable.

What is causing high inflation?

Many different economic factors can contribute to increasing inflation, but in general, the leading causes of inflation can be broken down into two categories:

  • Cost-push inflation: When prices of products and services rise because production costs rise, those extra costs are passed on to consumers.  
  • Demand-pull inflation: When the demand for products increases and prices rise because production can’t meet the demand. 

Why is inflation so high right now? A combination of both cost-push and demand-pull inflation is thought to be pushing inflation rates to levels previously not seen for several decades. In the last few years, money saved from staying at home and low-interest rates put some cash in our pockets. 

As people began resuming out-of-house activities, demand for products and services spiked, but companies faced supply issues and staffing shortages. 

Plus, the turmoil around the world, including the war in Ukraine, contributed to an increase in gas prices. Each variable has created a recipe for surging prices. 

When will inflation go down?

Experts predict inflation to fall gradually over several years rather than all at once. To combat inflation, the Federal Reserve announced increases to the target Federal Funds rate in March, May and June. 

Increasing benchmark rates aim to make borrowing more expensive, creating an environment where consumers and businesses spend less, which can cool off the market. 

However, rate hikes alone haven't been a quick fix to other supply issues, and it could be some time before consumers get a reprieve from high prices.

5 ways to manage your finances with soaring inflation

We can’t control inflation, but there are tactics we can use to make the most of our money while the prices of goods are high. Here are the steps you could take.

Ensure your salary is competitive

The job market is still hot right now. Suppose your salary is no longer enough to live on comfortably. 

In that case, you could try to negotiate a raise, apply for a new role or explore what salary packages other employers have to offer. Starting a side business or side hustle is another way to bring in extra income.

Put off major purchases

If you’re in the market for products that are expensive right now (e.g., homes or used cars), holding off on the purchase until the market cools could help you save money.

Shop where the discounts are

Using savvy shopping strategies like getting a Costco membership to take advantage of cheaper gas or using a gas rewards card could help you save money or earn rewards to redeem for cash or gift cards.

There may also be some perks you're not taking advantage of. For example, Amazon Prime members can now get a free year of GrubHub Plus for food delivery. We also have a roundup of the best Prime member perks to get the most out of your membership. 

Pay off revolving debt

As the Fed rate increases, interest rates on credit cards and other credit lines may also increase, making it more expensive to revolve a balance. Try to pay off your credit card balances to save on interest.

Diversify your investments

Consider adding investments to your portfolio that benefit from inflation, such as real estate. Buying real estate investment trusts (REITs) is a way to invest in real estate without actually purchasing property. Short-term bonds and commodities could be other investment options during times of high inflation.

Should you worry about inflation?

Inflation is important to consider when financial planning — but don’t panic. Now is a good time to revisit your budget and make adjustments. 

It’s also worth doing an investment check-up to ensure your assets are allocated in a way to maximize return without taking on too much risk.

Speaking with a financial advisor could help you develop a financial plan that fits your risk tolerance and makes sense for your investment goals and timeline.

Read next: How to shop with grocery coupons for beginners and here's how to pay off credit card debt and save on interest. You could also get an inflation-relief stimulus check if you live in one of these states — check to see if you qualify. Also, mortgage rates soared past 7% this week — here's what it means for you.

Taylor Medine
Personal finance writer

Taylor Medine is a personal finance writer with over eight years of experience writing books, courses, guides, and articles that demystify personal finance topics, such as how to repay debt, build credit, shop for credit cards, and more. In 2013, Taylor started documenting her efforts to stretch a dollar as a recent college grad on a personal blog. Eventually, her passion for finance writing grew into a full-time career in explaining intimidating money topics to the everyday consumer. Taylor’s work has been featured on Bankrate, Experian, Forbes Advisor, The Balance, Business Insider, Credit Karma, and more. Follow her on Twitter @taytalksmoney.