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Believe it or not, inflation is coming down. Of course, many people would disagree because the prices of most everyday items have been rising for months with seemingly no relief. But the monthly reports produced by the Bureau of Labor Statistics (BLS) have shown the inflation rate is declining for consumers and businesses.

In fact, according to the Consumer Price Index (CPI), the inflation rate peaked in June 2022 with a 9.1% year-over-year gain. But since then, it has fallen to 4.2% in April 2023. Similarly, the Producer Price Index (PPI) reached a maximum in March 2022 with an 11.7% 12-month change. This index has also decreased to 3.4% in April 2023.

It’s Not the 1980's

The last time Americans experienced inflation like this was in the 1980's when Ronald Reagan was President. At the time, the rate climbed to almost 15%, the highest on record.

Inflation resulted mainly from the effects of rapidly increasing oil prices caused by the second energy crisis in 1979. During this time, the cost of oil tripled because of hoarding and lower production. The United States Federal Reserve, led by Chairman Paul Volcker, eventually brought inflation under control.

But it is not the 1980's, and times were different then. Today, the U.S. is the largest oil producer in the world, and gasoline is a smaller percentage of total consumer expenses. Instead, this time the causes were the long-term effects of the COVID-19 pandemic, the Russo-Ukrainian War, and too low-interest rates for an extended period. The result was persistent supply chain disruptions and labor shortages leading to surging prices.

Why Does Everything Still Seem Expensive?

Despite the declining inflation, most Americans still feel the pinch of higher prices with tighter budgets. People received raises in 2022, but these were often less of an increase compared to inflation. Also, the pain level may be especially high for retirees on a fixed budget.

The bottom line was prices rose faster than income in 2022. Although 2023 is better, prices are still increasing more quickly than the 2.3% average monthly gains between 1991 and 2019.

Moreover, price increases were often the most in the food and energy categories, two expenses experienced weekly by consumers. Even in the latest report from April 2023, the CPI for the food category rose 7.7%, more than the average. Although gasoline and heating costs fell, other expenses worsened. For instance, outlays were up for electricity by 8.4%, shelter by 8.1%, and transportation services by 11.0% in the past twelve months. 

This point is inflation is very personal, depending on your spending habits. According to Liz Ann Sonders, chief investment strategist at Charles Schwab, “Inflation is very individual: Everybody experiences it in a very different way... pundits might obsess over the month-over-month reading... but that’s not how most people experience inflation. They think of it in terms of how much they spend when buying food or paying rent.”

Moreover, people with lower incomes are disproportionately affected by inflation because a greater percentage of their income is dedicated to necessities like milk, eggs, electricity, gasoline, etc. When these items’ prices increase faster than income, they face an uphill battle to meet monthly expenses.

A recent study by the Dallas Fed shows households earning less than $50,000 per year were the most stressed about inflation. On the other hand, those with incomes more than $250,000 are the least stressed.

Balance Your Budget to Beat High Inflation

A way to reduce monthly expenses is frugality, which is being economical with your money. Following tips about saving on monthly costs can help. For instance, “I have stopped eating out as much,” says Tiffany of Money Talk with Tiff. “After looking at my budget, I realized I was spending way too much eating fast food. I have been cooking our meals because even with the price of groceries up, it still comes out less than the restaurants.”

In another example, making your coffee instead of buying an expensive latte daily can help on the margins. But the reality is most consumers are not visiting the coffee shop every day, and thus, the savings are minimal. So instead, people must spend less than they earn by following a budgeting system, like the 50-30-20 Budget Rule.

The rule was popularized by Senator Elizabeth Warren and her daughter Amelia Warren Tyagi in their 2005 book All Your Worth: The Ultimate Lifetime Money Plan. It divides after-tax income into three simple segments: 50% needs, 30% wants, and 20% savings. The Budget Rule is an excellent starting point for creating goals and balancing a budget to beat inflation.

Think Long-Term with Dividend Stocks

Besides spending money wisely, relying on alternative sources of income, like dividend stocks, may help beat inflation. Many companies increase their dividend payout rates annually regardless of inflation. As a result, investors following a dividend growth strategy will receive an increasing passive income stream each year.

Categories like the Dividend Aristocrats, companies raising their dividend for 25+ years and in the S&P 500 Index, have an 8.2% compound annual growth rate on the past decade, more than inflation.

If you feel stocks are too risky, an alternative is to select a low-cost dividend growth exchange-traded fund, like DGRO or VIG. The iShares Core Dividend Growth ETF (DGRO) and the Vanguard Dividend Growth Appreciation ETF (VIG) are both low-cost with nice dividend yields comprising of stocks increasing their dividends.

The Bottom Line

Although trending down from the peak, prices still are higher than last year. But inflation is coming down on average, and some items are getting cheaper while others are becoming more expensive. Hence, consumers and businesses will continue to struggle with the cost of necessities like cereal, eggs, and dairy. However, the U.S. Federal Reserve’s and policymakers’ fight against inflation will eventually bring it toward the long-term goal of 2%.

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