Here’s how inflation hits your wallet

The average hourly wage has increased over the last year to $32.36 for Urban Wage Earners and to nearly $11.00 per hour for most others. Generally, this would be cause for rejoicing. Higher wages mean more spending power, which makes for a more robust economy, right? Southern California residents are experiencing the highest inflation rates in decades. This affects the economy in ways that you may not realize.

What is Inflation?

The Department of Labor defines inflation as “the overall general upward price movement of goods and services over time.” You may think, “Ok, but what does this mean to me?” Modern money has no intrinsic value, unlike gold and other precious metals. Instead, its value is measured by what it can buy. To compare historical costs with today, economists adjust prices for inflation. For example, $3,000 in 1965 is equivalent to about $26,808 today. It calculates the inflation rates to make it a side-by-side comparison.

Is Inflation Good or Bad?

Most people agree that too much inflation weakens the economy. However, inflation itself isn’t bad, and a modest amount allows the economy to grow at a healthy pace. When inflation goes up, the Fed (Government) raises interest rates. This can make getting a mortgage or car loan more expensive, but it also helps your savings account build faster. When inflation is too low, the Fed lowers interest rates, hoping consumers will take out more loans. When it is too high, prices skyrocket for everything from fuel for heating and gasoline to milk and eggs.

What are the Effects of High Inflation Rates?

The cost of consumer goods rose 8.3% between August 2021 and August 2022. Unfortunately, the average hourly rate, which only experienced a 5.2% growth, didn’t keep up. The impact of inflation, especially at these levels, affects Americans everywhere, not just at the grocery store and gas pump.

Loss of Purchasing Power

When interest rates are higher, it’s harder for borrowers to pay back. Most people take out loans or use credit cards to make major purchases, from homes and cars to kitchen appliances. Credit cards typically have a variable interest rate, which means your payments increase when the interest rates do. If you take out a loan, you can stretch out the payments to keep them low, but you will pay more interest.

For example, you go to the bank and are approved for a $3000 loan to be paid back over four years. The interest rate (APR) is 14.47%. Your monthly payment is $83. You’ll pay almost $1000 in interest over the course of four years. You may have to pay a higher interest rate if your credit is not great. If your APR is 26%, your monthly payment will be $101, and you’ll pay nearly $2,000 in interest over the loan payment term.

If your budget is already tight, it may not have room to stretch that far. Thousands of Rancho Cucamonga-area residents will put off home improvements, new cars and other purchases until interest rates are lower.

Lagging Economy

The loss of purchasing power and higher prices for everything from eggs to airline tickets means everyone’s budget will feel it. Those living on a fixed income feel the pinch the most. When consumers make fewer purchases, credit becomes more expensive, and credit requirements tighter.

Middle-income Californians used to certain disposable income levels also feel the crunch. Thousands of people must decide what bills to pay this month and rotate them next month. Mortgages with adjustable rates have skyrocketing payments.

Can Inflation Be Controlled?

There are three ways the U.S. Government controls inflation:

Increase Bank Reserve Requirements: Banks must have a certain reserve amount. During inflationary periods, the Government increases that amount. This means that the banks have less money to loan, which reduces consumer spending and hopefully leads to a drop in prices.

Higher Interest Rates: Raising interest rates makes it more expensive to borrow money. When people spend less, it lowers demand. Over time, prices drop.

Reduce Money Supply:  The Government reduces the amount of money available in several ways. The most common involve physically pulling money out of circulation and increasing the interest paid on bonds. This encourages more people to buy them, which gives more money to the Government, removing it from circulation.

When Will Inflation End?

Inflation means higher prices, and your money buys less. The increases in demand for consumer goods have slowed and flattened in many cases. However, the cost of services is still high. Supply chain disruptions haven’t yet cleared. This can make getting products to market more expensive and that cost is passed to consumers; like eggs going from $1.83 to $4.02 in one year. Experts predict that the lagging economy will continue throughout most of 2023. Colder weather means the heating season is here. Depending on availability, natural gas and electricity prices could soar. Post-pandemic consumer demand, the war in Ukraine and supply chain shortages add to the economic uncertainty.

If you have already tightened your spending and are still struggling financially, it might be time to consider other options. Homeowners may benefit from a loan modification program. These programs help you keep your home by changing aspects of your loan, such as the interest rates and loan terms. This could lower the monthly amount you must pay, giving you some breathing room. Credit card companies often have programs you may qualify for that reduce payments or put them on hold. Although this may mean you can’t use the card, you also don’t have the payment requirements.

Get Advice from a Rancho Cucamonga Lawyer

Getting out of debt and having some breathing room to move forward can take away a lot of your day-to-day stress. Talking to attorney Terrence Fantauzzi can help you understand your options. Choosing chapter 7 or chapter 13 bankruptcy may be your best choice, but not necessarily. Call 909-552-1238 today to schedule your free, no-obligation consultation.

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