Is It Time to Panic About Inflation?

Lifestyle

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Holy moly, the CPI (consumer price index) increased 6.8% for the 12 months ending in November. That’s the largest increase in almost 40 years. I never faced this kind of inflation in my adult life. Many of you probably haven’t either. Since I graduated college in 1995, inflation has been around 2-3%. It was manageable and we became used to it. Most years, we could increase our income and overcome inflation. This enabled us to grow our wealth through saving and investing.

2021 is a bit discouraging. 6.8% is a huge headwind. Could we increase our income that much? The problem applies to wealth (net worth) as well. It needs to beat inflation and 6.8% is much bigger than I’ve ever seen. The price of most items increased over the last 12 months according to the CPI summary from the U.S. Bureau of Labor Statistics. It’s pretty scary and could become a big issue if high inflation persists. Is it time to panic? Well, I don’t know. Let’s take a look at our spending, income, and net worth. I have a feeling, 2021 wasn’t going to be as good as past years.

Spending

We all felt this one coming. The price of gasoline, food, rent, and everything else has been going up this year. However, inflation is different between categories and locations. Everyone is feeling the effect of inflation differently.

Here is a chart I made from the CPI data.

Wow. Maybe I should remove Gasoline and used cars. Those two categories made everything else look small. The only anomaly here is the airline fare. I just got my ticket to Thailand and the price was very reasonable. Okay, let’s dive in a bit further to see how inflation affected our Big 3 – housing, transportation, and food.

Housing

We haven’t felt a huge hit on housing. Our mortgage remained the same. Our property tax increased 9%, but I blame that on Portlanders who never met a tax bill they didn’t like. The utilities were a mixed bag. The electricity and water bills haven’t changed much. But the natural gas bills increased about 30%. That’s about $30/month more in the winter.

We are paying more for housing, but the increase isn’t too bad if we exclude property tax. Fortunately, we could absorb $30/month extra for cooking and heating (natural gas). It’ll be tougher for people in the lower-income brackets, though.

Transportation

Gasoline price increased an incredible 58% from last year. Yikes! I’m sure almost everyone noticed this. Fortunately, we drive very little. I usually fill up just once or twice per month so the increase hasn’t hurt us too much. We probably spend about $20/month more on gasoline. That isn’t too painful.

Although, we plan to drive down to California this Christmas. This road trip will be more expensive than previous trips due to inflation. It’ll still be worth it to see families during the holidays. Fortunately, I don’t plan to buy a vehicle anytime soon so we don’t have to deal with higher vehicle prices yet. That seems like a huge hassle.

Food

Food price inflation is very noticeable as well. Most items at the grocery stores have gone up in price. Many products also come in smaller containers.

The most noticeable change is beef, as the CPI data indicated. I used to buy beef occasionally, but I haven’t purchased any steaks since last year. Even ground beef is more expensive now. Fortunately, chicken and pork haven’t increased in price as much. Although, the CPI reported that pork index rose sharply last month. We’ll probably see pork prices increase very soon. I did find a sale on beef chuck roast before Thanksgiving and purchased a big piece. It was a great deal at $4 per pound.

Our grocery spending hasn’t increased much, probably around 6.4% as the CPI reported for food at home. We shifted our spending around a bit and avoided the most egregious inflated products – beef.

Eating out has been more expensive as well. Every restaurant increased the price of its offerings. That’s understandable because of the increase in labor costs and ingredient prices.

This lamb shank cost $16. They just increased by $1.

All in all, our cost of living increased more than usual. Normally, inflation is barely noticeable. Luckily, I think we fared pretty well compare to many families. We don’t drive much and our housing expense is relatively stable. Our food spending is higher, but we shifted our spending to less inflated categories. We avoided the worst bits of this inflation storm so far and our cost of living hasn’t increased that much.

Income

Here is the biggest problem with inflation. You need to make more money just to keep up. So did you earn 6.8% more this year? If the answer is no, then you’re falling behind.

Mrs. RB40 got a cost of living adjustment and a raise earlier this year. According to my records, she made about 7% more in 2021. That’s right in line with inflation. Normally, a 7% raise is good, but it’s barely adequate this year. Most employers just had their annual reviews in November so I guess we’ll see how generous they’ll be soon. Hopefully, she’ll get a good raise.

My income increased about 20% this year, but that’s because I hustled a lot more than last year. I charged over 3,500 scooters this year to offset the decrease in my blog income. It worked, but I am worn out. Unfortunately, working more isn’t sustainable. I don’t want to keep working more just to keep up with inflation. Next year, I plan to work much less and make less money.

Lastly, our passive income stayed about the same as in 2020. There are several reasons for this. Our rental income decreased because we had a large repair bill. Dividend income also decreased a bit because some companies cut dividend payments. Come on, Disney! When are you going to start paying dividends again? 2021 was a tough year on the passive income side for us. I’m hopeful that next year will be better.

Our income increased more than inflation, but we both worked more this year. It’ll be hard to repeat next year.

Net worth

As for the net worth, we’re up about 10% this year. That’s pretty good for a normal year with 2% inflation, but 2021 isn’t normal. Inflation is nearly 7% this year so the real gain is just 3%. I’m happy we made progress, but I’m also a bit disappointed with the magnitude. My target for annual net worth gain is 10%. This goal is inadequate with high inflation. I’ll probably tie the net worth goal to inflation from now on. Maybe 7% + inflation or something like that.

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Is it time to panic? What can we do?

The big question now is if we should change our behavior to adjust for higher inflation. Should we panic and expect higher inflation in the coming years? Unfortunately, inflation is kind of a self-fulfilling prophecy. If you expect high inflation and act accordingly, then inflation will be higher. For example, you think a used car will continue to get more expensive so you go out and buy it ASAP. When everyone thinks like that and rushes to buy used cars, the supply will diminish and the price will increase. There are other reasons too. Workers expect prices to rise so they demand more pay. Companies think costs will increase so they increase the price for their products. It’s bad to expect high inflation.

I’m still hoping this high inflation period is transitory like the Fed said. Once the supply chain works itself out, inflation will return to a more reasonable level of 2-3%. We don’t need to buy any big-ticket items so we won’t affect the consumer market much. On food, we’ll probably minimize beef consumption for a while and wait for the price to stabilize. Fortunately, I can cook all kinds of food so we don’t need to buy beef that often. We need to eat more vegetables anyway.

On the income and net worth side, we’ll continue to save and invest as usual. As long as we put our savings to work, it should be fine. Companies are making money hand over fist because American consumers are spending like crazy. In conclusion, continue to invest. Don’t just put your savings in the bank because it’ll lose value due to inflation. Stay the course and we’ll get through this.

It isn’t time to panic yet. Let’s see how 2022 turns out. If inflation keeps increasing, then maybe it’ll be time to figure out a new strategy. For now, let’s breathe and stay calm.

Have you been spending more due to inflation? Are your income and net worth keeping up with inflation?

Image credit: Julian L

Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.