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There is no question that persistently high inflation is weighing on household budgets across the country.
However, depending on variables like location and spending behavior, your personal inflation rate may be better or worse than the national average. In September, overall prices were 8.2% higher than a year earlier as measured by the consumer price index (CPI).
“Once you get into an environment of high inflation, the impact can vary quite a bit between individuals,” said Brian Bethune, an economist and professor at Boston College.
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Take location for example. Some metro areas in the US have headline inflation rates that are worse than average, according to a study by personal finance website WalletHub, which used data from the Federal Bureau of Labor Statistics to create its study.
In the Tampa, Fla. area, September prices were 10.5% higher than a year earlier, the study shows. And in Phoenix, annual inflation was 13% in August. (There is a delay in reported data from some metro areas.)
Aside from where you live, the impact of inflation on your budget also depends on your personal spending, which falls into different CPI spending categories — like transportation, eating out, or medical care.
“You can have two people in the same city with very different spending habits,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York City.
Rent and groceries weigh on budgets
Higher prices are taking their toll on households, as 32% of them have paid bills late in the past six months, according to a recent survey by LendingTree.
Food prices have increased by 13% since September 2021. So-called core inflation – which excludes energy and food – is up 6.6%. Housing, which includes rents, is also up 6.6% over the past year and accounts for more than 40% of core inflation.
“Low- and middle-income households spend most of their income on basic needs [housing, food, energy]said Dawit Kebede, senior economist at the Credit Union National Association.
Although inflation is a normal part of the economy, the current pace is well above the Federal Reserve’s target rate of 2%.
The country’s central bank is expected to continue its campaign to lower inflation by raising interest rates. When the Interest Rate Committee meets in early November, it is expected to raise the so-called federal funds rate by 0.75 percentage points for the fourth time in a row. This interest rate has a ripple effect and ultimately impacts the interest rate you pay on credit cards and loans.
The general idea is that by making the cost of borrowing more expensive, spending will decrease and inflationary pressures will decrease due to lower consumer demand. This approach can also lead to job losses.
Another rate hike will “bring more pain to low- and middle-income households as they are among the first to be hit by rising unemployment,” Kebede said.
The labor market is currently tight: the unemployment rate is a low 3.5%. However, it is expected that an economic slowdown would lead to job losses.
Experts say it pays to have a financial cushion (e.g. emergency funds) in case income falls.