Is Your Budget Feeling the Burn? Here Are 6 Ways Inflation Is Affecting Your Money.


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Is your budget feeling stretched thin right now? It’s likely due to inflation, which is affecting your money in a few different ways.


Key points

  • As of mid-June, the inflation rate was up by 8.3% year-over-year, and it’s having a significant impact on most people’s finances.
  • The cost of groceries, from fruit and vegetables to dairy products, is up by over 11% — which may be busting your food budget.
  • Your savings rates, borrowing power, and the value of your cash may also be feeling the inflation burn.

Over the last six months, the talks have shifted from the unstoppable housing market to how inflation is affecting the economy — and for good reason. As of mid-June, the inflation rate in the US had grown by about 8.3% compared to the year prior, which is a huge leap compared to what we’ve seen in years past. In turn, the prices of everything you buy and the utilities you pay for have gone through the roof.

That alone is taking a big toll on people’s finances. But while inflation is causing everything we buy to have a higher price tag, that’s hardly the only effect it’s having on your budget. Inflation is affecting your money in more ways than you may realize. If you’ve been wondering why your bank account balances haven’t been going as far recently, here are six ways inflation is affecting your money.

1. Your food budget is being busted

Right now, essentials cost a lot more than they used to, and it’s likely having a big impact on your budget. While supply chain issues have played a part in the rising costs of these types of essentials, much of it can be attributed to inflation.

According to recent BLS data, the cost of food at home — items like fruit and vegetables, meat, dairy products, and other groceries — is up by 11.9% compared to last year. What that means is that millions of Americans are feeling the burn when filling up the grocery cart. Your budget isn’t stretching as far — and you may even be dipping into other parts of your budget to fill up the pantry.

But it’s not just groceries that are more expensive compared to last year. If you’re occasionally ordering food away from home, either at restaurants or takeout, you’re paying about 7.4% more on average compared to 2021. That’s the highest jump we’ve seen since 1981, when the prices for food away from home increased by 9% year-over-year.

2. Commuting to work is draining your funds

We all see what’s happening with the prices of fuel. As of June 15, a gallon of gasoline was hovering at an average price of $5.01, according to AAA. The average for a gallon of gas was $3.07 just one year ago.

So, if you’re commuting to work or driving for other reasons, that extra $2 per gallon at the pump is probably putting even more strain on your budget.

3. The interest on your savings can’t keep up

Historically, the average interest rate on savings accounts has been pretty low. If you’re looking to make money on your money, a savings account isn’t typically the best way to do it. These days, though, the interest you earn on the money in your savings is basically negligible thanks to inflation.

As of mid-May, the average savings account rate was 0.07%, which would amount to about $3.50 per year in interest payments if your savings account had $5,000 in it. While some banks, especially online banks, may offer slightly higher rates, it’s hardly anything worth writing home about.

But the rate of inflation is hovering at about 8% right now, which means your money is worth about 8% less than it otherwise would be. What that means is that the interest on your savings can’t possibly compensate for the devaluation, even if you snag a higher-than-average rate.

4. Your investments may be underperforming

If you have money tucked away in certain types of investments, you may not see them perform like you were hoping for right now. While the impact of inflation on investments varies, assets like regular bonds and certificates of deposit (CDs) are at risk of underperforming due to inflation.

That’s because you earn money on these investments through interest payments, which stay the same throughout the contract term. So, if your money is tied up in these types of investments, the returns may not be doing much to counter the losses from inflation.

5. The value of your cash is dwindling

Unchecked inflation is tough on your finances because it can, and does, reduce the value of your money over time. The rate of inflation we’re currently seeing causes the prices of consumer goods to skyrocket. In turn, your money doesn’t stretch as far right now — and isn’t worth as much in the long run, either.

For example, let’s say you put away $2,000 in your sock drawer for a rainy day. If you pull that money out of the drawer to spend it in five or 10 years, you likely won’t be able to buy as much with it as you could have even today — despite the higher prices we’re facing due to inflation .

You aren’t technically losing any of the money you stashed away. It’s all still available to you, but its purchasing power is still a lot weaker than it was before.

6. Your borrowing power may be reduced

While decreasing borrowing power is not a direct result of inflation, it does tend to occur in tandem with higher rates of inflation. That’s because when inflation levels are high, the Federal Reserve typically raises the federal funds rate to try and slow down the economy, which in turn then impacts consumer interest rates.

That has already been done three times this year — in large part to try and stop surging inflation. And, while raising interest rates has helped to slow down mortgage loan borrowing, it has also made it harder for borrowers to afford the interest on large loans for big-ticket items.

When you can’t afford the higher interest on a car or home purchase, your buying power is reduced. In turn, that could mean the difference between making your big purchase and waiting for rates to drop again.

If you’ve noticed that your money isn’t stretching as far lately, there are ways to help fight back against these types of issues. While you can’t do much about the higher price of housing or groceries, you can make changes in other ways.

If you’re dealing with low savings rates, it may help to shop around for new savings accounts — and online banks may be a good place to start. It may also help to shop around if you’re trying to borrow money for a big purchase or high-priced item. Rates can vary significantly from lender to lender, so if you aren’t shopping around, you could be even further reducing your borrowing power with higher-than-average interest rates.

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