Economists Estimate That Cost of Living Will Increase $5,200 This Year Because of Inflation Tax

The average U.S. household can expect to pay an extra $433 per month to keep up with the same lifestyle they had last year. Here's why.

Money flying off stack of bills in man's hand
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Families who faced economic hardship during the COVID-19 pandemic may be in for a big surprise this year—and not the good kind. According to estimates by Bloomberg Economics, the average U.S. household can expect to pay an extra $433 per month to keep up with the same lifestyle they had last year. That's a whopping $5,200 per year and, this time, without stimulus checks and the added child tax credit many families received from July to December 2021.

This is all due to the current inflation rate raising prices faster than in the past 40 years. The Bureau of Labor Statistics said that this is due to rising food and rent costs, but since this report was published, the Russian invasion of Ukraine has skyrocketed already expensive gas prices. And this isn't even to mention that home prices have also soared during the pandemic. The average American family's income needs to be $144,192 to buy a home, but the median household income is $69,178, according to a 2021 report by Clever Real Estate.

For families already spending to their max, this latest finding that bills are rising further this year may mean added struggles. But what does it all mean, and what can we do about it? Below, we explain inflation, why this has happened, and how it could impact your family.

What Is Inflation and Why Does It Happen?

To put it as simply as possible, inflation is when the purchasing power of money declines over time. Still confused? Me too. In even simpler terms, the prices of groceries, gas, electricity, rent, and more rise every year, but your salary has stayed roughly the same. When this happens, it means that the same $35 that your family made for an hour's worth of work (assuming you're in the median household income) is used to buy a whole rotisserie chicken, mashed potatoes, gravy, and two different kinds of vegetables for dinner a year ago now will only buy you half a chicken, mashed potatoes, and one type of vegetable.

Inflation can happen for many reasons, such as how being stuck indoors during the pandemic has made many families reevaluate their lives and decide to move and/or purchase a home. This is called a surge in demand, where the fact that more people want to buy a house means that sellers can increase their prices even though those same families aren't making more money.

Inflation can also happen because the cost of making a product or providing a service has gone up. For example, the war in Ukraine has caused concerns over Russia being the third largest producer of oil in the world and how sanctions against the country will impact oil prices.

Inflation also happens even when big, worldwide-changing events aren't making news. Regular events such as a change in fiscal policy or company employees unionizing can also cause inflation. For instance, if the government decides to stimulate the economy by investing in infrastructure, the cost of goods and services could go up, impacting regular families. Or Amazon workers unionizing may mean that the company has to begin paying their workers more, which they could pass down to the consumer by increasing their prices.

How This May Impact Your Family

According to the Bloomberg report, not all news is bad. The increase in pay at work and people saving more money during the past two years of the pandemic means that spending should stay at a decent pace this year. However, as those same savings decrease because people are spending more due to inflation, more people who may have chosen to remain jobless during the pandemic (perhaps to care for vulnerable family members) will have to go back to work—which will mean that the pay increase we had been seeing will likely go down. Quite the catch-22, amirite?

With no more stimulus checks or child tax credits, family budgets will get much tighter. Some of the goods impacted by today's inflation include groceries that most of us buy, such as eggs, meat, milk, and vegetables. Home and rent prices will keep increasing, too, forcing families below the median household income to get priced out of their neighborhoods as those who got priced out of more costly areas begin to move in.

To combat inflation's impact on your family, you can budget for groceries, clip coupons, shop the sales rack, go through your freezer and pantry before putting together your grocery list—and stick to only those items on the list. Reviewing the cost of things you buy and perhaps going for the generic but-tastes-just-like-the-real-thing item at the grocery store can also help.

However, low-income families will be the most vulnerable as prices increase, and, unfortunately, there is a limit to what we can do when wages stay the same and costs rise. In the coming months, you will likely see a lot of information about how families can cut costs and survive inflation by buying more vegetables (since the price of animal-produced food products seems to be increasing at a much higher pace).

The problem with this type of thinking is that it puts the onus on families—the same ones now spending an extra $433 per month—to figure out how they can cut their spending while also likely stressing out about the increase in prices. However, we can and should put the focus back on the U.S. Government, which can help this inflation with various fiscal policies such as public investment in childcare so that parents can get and keep a job.

In the meantime, families should brace themselves for the impact of inflation by ensuring they have an emergency fund, if they can, and are taking full advantage of their employer-sponsored retirement plan—if that's an option. And if you want to get involved in pushing your representatives to support universal childcare, that's good too.

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