How do I manage the cost-of-living crisis?

What is causing the cost-of-living crisis?

It seems hardly a day goes by without prices increasing, and although there are multiple different things pushing prices up, no single factor is solely responsible for creating the current squeeze on living standards.  

On the one hand, the shadow of the pandemic is continuing to rock economies around the world.

While many countries, such as the USA, UK and much of vaccinated Europe are looking to the future, many other countries vital to global production and trade, such as China, are struggling to keep up with new Covid outbreaks.

With lockdowns still in place across much of China, many of the most important goods and components to western consumers are simply not being made quickly enough to keep up with demand.

So, with massive shortages still plaguing western countries, the prices of many popular goods and items are rising.  

And while consumer goods prices are increasing, Russia’s invasion of Ukraine and subsequent fallout means that oil and energy prices have risen sharply.

Governments around the world may be trying to wean themselves off Russian oil and seek more renewably sourced energies closer to home, but there isn’t yet a viable solution to alleviate pressures on households.

Between Covid and spiking energy prices, people are finding it harder and harder to keep up with price rises.

Russia’s invasion of Ukraine and subsequent fallout means that oil and energy prices have risen sharply

What is the current inflation rate?

In June 2022, the inflation rate in the US reached its highest level in decades at just over 9 per cent.

And although inflation has shown signs of plateauing since this peak, inflation still remains at an extremely high level.  

To try and cool inflation, the Federal Reserve has been raising interest rates to try and get prices back to normal levels.

But as interest rates have risen, so too have the interest rates on people’s mortgages and loans, meaning many people may have to pay more interest on their mortgages and loans than they did before.   

Is there going to be a recession in the US?

One of the complexities of the current landscape is that despite rising prices and falling consumer confidence in the economy that should signal a major slowdown in the near future, the US economy is continuing to generate hundreds of thousands of jobs.

In July 2022, more than 528,000 new jobs were created, suggesting that the current cost-of-living crisis isn’t triggering a recession just yet.  

This doesn’t mean that there isn’t a recession coming in the future though.

There’s no guarantee that inflation will return to normal levels before the end of next year unless the Federal Reserve decides to take even more action.

Should the Federal Reserve raise interest even higher to reduce prices, it could trigger a recession.   

But in the global picture, the situation in the US is neither the best nor the worst.

The inflation rate is high globally, but the US’s rate is quite average, meaning that while still possible, there isn’t a recession forecast imminently.

Should the global picture continue to worsen, however, recessions in other parts of the world could lead to more trouble for the US.

How can you protect your money?

With issues facing the US economy on all sides, it’s become very hard to protect your money and to save for your financial goals.

More worryingly, the cost-of-living crisis is leading to many people adding to their levels of personal debt in order to make ends meet.  

Although everyone’s personal circumstances will affect the ways in which the current price rises will impact them, there are some steps everyone can take to ensure that they can keep their money working for them: 

1. Adjust budgets: If you enjoy spending the majority of your monthly paychecks, it’s time to take a look at budgeting. Nobody knows exactly how much more inflation is on the way, so take the time today to figure out what you need to get through the month, and what is an extra bonus. It’s better to be prepared today than shocked tomorrow.  

2. Try to save more: Higher interest rates might not always be good for the economy, but they could be good for those with a savings account. If you haven’t already, take a look at the different saving accounts that banks are offering. If you already have an account that isn’t offering the same rates as others, you could consider moving your savings.  

3. Cut subscriptions you aren’t using: Whether it’s streaming services or gym memberships, if you aren’t using them frequently enough for them to be of value, you could probably use the money elsewhere. 

4. Check your contracts: Expensive cell phone contracts can be a monthly drain on your finances. If you’re already having to increase your expenses to stay afloat, it might be time to cut your current contract and find something better value for money.

there are steps everyone can take to ensure that they can keep their money working for them

Preparing for retirement during the cost-of-living crisis

For those approaching retirement, seeing more and more of your income disappearing on daily expenses can be worrying — especially with two thirds of Americans retiring this year not expecting to give up work completely.  

But there are things you can do to mitigate rising prices and protect your retirement.

To help protect your retirement funds, consider: 

• Buying an annuity: Annuities guarantee you a fixed source of income that, depending on the specific annuity policy and provider you choose to go with, could keep your income above the inflation rate. 

• I-Bonds: I-Bonds are saving loans offered by the US government and pay interest at an above-inflation level. They won’t be enough to fund your retirement, but these can at the very least offset your shrinking income. 

• Delay Social Security: If you’re able to, delaying taking your benefits until full retirement age can work in your interest. You’ll receive a lifetime annuity equal to the amount of payroll tax you’ve paid over your working career, and for each additional year you delay, you could receive an 8 per cent bump to this figure as well as further cost-of-living-adjusted payouts.  

• Part-time work: Nobody knows for sure how long the current squeeze on living standards will last, but inflation is expected to return to more normal levels in 2023. Even some part-time work can help see you through to a more affordable future retirement.

Although the cost of living is set to have an impact on everyone’s earnings and living standards, there are ways to protect your money.

Whether you’re preparing for your retirement or just looking to make ends meet, we can help you plan for the future.

If you found this article useful, you might also find our latest piece on inflation slowing for sixth successive month informative, too.