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Inflation Calls For Curbs On Spending

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The Tampa Tribune

Published: July 13, 2008

WASHINGTON - We've all been so focused on whether we are officially in a recession that we may not have paid enough attention to the creeping threat of inflation.

But a period of rising prices is equally threatening to your financial well-being.

The Federal Reserve recently decided to keep its target for the federal funds rate at 2 percent, partly because of concerns about inflation.

"Uncertainty about the inflation outlook remains high," the Federal Open Market Committee, which sets the funds rate, said in a statement in announcing its rate decision. "The upside risks to inflation and inflation expectations have increased."

Inflation, simply put, erodes the purchasing power of your dollar.

Talk to anyone who had to pay for gas, groceries or any consumer goods in the 1970s and they'll tell you how hard inflation can be.

I remember those days. I recall my grandmother piling us in the car before dawn, getting us up that early to get in line to buy gas. At one point, in many areas, you could only buy gas on odd or even days of the month. Which day you could buy gas depended on the last digit of your license plate number.
Flexible Times Federal Reserve Chairman Ben Bernanke also remembers that time, as he recounted in a speech to graduating seniors at Harvard University in early June.

"Then, as now, we were experiencing a serious oil price shock, sharply rising prices for food and other commodities, and subpar economic growth," Bernanke said.

The economy had just gone through a severe recession, during which output, income and employment fell sharply and the unemployment rate rose to 9 percent, Bernanke told the graduates. Consumer price inflation, which had been around 3 percent to 4 percent earlier in the decade, climbed to more than 10 percent.

Bernanke doesn't think we're headed for a similar slide into a '70s-style economic crisis.

"I see the differences between the economy of 1975 and the economy of 2008 as more telling than the similarities," he said. "Today's situation differs from that of 33 years ago in large part because our economy and society have become much more flexible and able to adapt to difficult situations and new challenges."

Be A Smart Consumer

Still, with gasoline rolling past $4 per gallon and utility bills skyrocketing, it's enough to give you a heat stroke.

So what does a family do when they've been setting aside, say, $100 a month for gas and now it costs $300 or $400 a month?

If you haven't already moved toward becoming more energy efficient, you won't make your budget work in an inflationary environment.

Drive slower. Use the air conditioner less. Walk through your home and see what you can do to make it more energy-efficient. I started charging my kids $1 every time a light was left on after they exited a room. They've become much better at conservation.

Start shopping smarter by switching to store-brand items. Bend down. Often the less costly items are on the lower shelves.

If you're worried about inflation eroding the buying power of your investment dollars, consider putting some (not all) of your money in two inflation-indexed securities offered by the U.S. Treasury: Treasury Inflation-Protected Securities and I Bonds. Both are designed for investors who want inflation protection and a guaranteed rate of return on their principal.

I know the economic whipsaw we're in is so frustrating.

But you have to do more then fret. The key to beat inflation is to do what Bernanke says. You have to be flexible with your finances. You have to act. Stop talking about cutting costs and do it.

Michelle Singletary can be reached at The Washington Post, 1150 15th St. N.W., Washington, DC 20071.

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