Americans are increasingly worried about inflation again.
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The University of Michigan Index of Consumer Sentiment fell in January, and then plummeted nearly 10% in February. And sure enough, the Consumer Price Index (CPI) inflation reading from the Bureau of Labor Statistics (BLS) showed inflation heating up again in January. The CPI reading ticked back up to an annual reading of 3%. Core inflation ran even hotter, at 3.3%.
So much for the hopes that high inflation was behind us. What does that mean for middle-class Americans and their wallets?
Tighter Budgeting and Lifestyle
When inflation rises faster than your income, you lose purchasing power. You effectively take a pay cut. That means you need to tighten up your budget and trim your lifestyle.
“Prices are rising most for necessities, so they’re tough to avoid,” said Robert Frick, economist at Navy Federal Credit Union. “We’re seeing food, healthcare, auto insurance and shelter costs leading the surge in CPI. Middle-class Americans have already adopted coping strategies for most of these things, such as shopping more at discount retailers.”
Look for places you can cut back without making dramatic cuts to your quality of life. Which subscriptions can you cancel? What can you make for yourself rather than paying someone to make for you, such as coffee and lunch?
That’s the ugly reality of inflation.
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Sustained High Interest Rates
Everyone just assumed interest rates would fall in 2025, because they thought inflation was tamed.
Not so fast.
Dr. Brandon Parsons, an economist at Pepperdine Graziadio Business School, sees high interest rates sticking around for a while. “It is unlikely the Federal Reserve will reduce interest rates if inflation remains above 3%.”
Likewise, bond markets won’t allow yields to fall while they smell high inflation risk.
High interest rates make every debt more expensive, but nowhere does that hit middle class Americans harder than their housing costs.
Expensive Mortgages and Stretched First-Time Homebuyers
For three years now, 30-year mortgage rates have remained over 6% — and often exceeded 7%. That’s pushed the cost of homeownership out of reach for many first-time buyers.
Compounding the problem, many homeowners feel locked in place by their low fixed interest rates that they borrowed years ago. If they move, they’d have to borrow a new loan at an expensive rate — meaning they’d pay more each month, even for a lesser house.
So, many would-be sellers haven’t sold, leaving a low inventory of homes for sale. That, too, has made it harder for first-time buyers to enter the housing market.
Expensive Cars
Inflation makes everything more expensive, and cars have been no exception. But that might get even worse if the U.S. enacts tariffs on its largest trading partners.
One study by Jefferies, reported by NPR, found that the blanket tariffs on Canada, Mexico and China would add $2,700 to the average vehicle price. And Jefferies performed that study before the Trump administration announced specific tariffs on steel and aluminum — two crucial components for cars.
Expect more expensive cars in your future, especially if tariffs become an economic reality.
Reassessing Your Retirement Portfolio
Recessions come and go, but inflation tends to stick around permanently.
Joseph Camberato, CEO at National Business Capital, has seen this firsthand. “Even if inflation slows, prices have already jumped to a new level, and they’re not coming back down.”
That means you may need more saved for retirement than you think. Your living expenses in retirement will likely cost far more than you pay today, in nominal dollars.
So how should you invest for retirement, so your money grows faster than inflation?
Invest In Inflation-Resilient Assets
Some investments simply rise in value right alongside inflation.
“Inflation doesn’t necessarily mean lower profits or stock prices,” said Parsons. “Since the [COVID-19] pandemic, for example, many firms have simply increased their prices to keep their profits and stock prices strong.”
Other investments can also keep pace with or exceed inflation, he added. “Inflation-resistant investments like real estate, gold and Treasury Inflation-Protected Securities (TIPS) can further mitigate inflationary pressures.”
Just watch out for bonds and cash held in low-interest accounts. Inflation eats into the real returns of bond interest — and the real value of your cash.
Find Ways To Earn More
Don’t want to tighten your budget and lifestyle? Earn more money.
That could mean negotiating a raise at your current job or pushing for a promotion. Alternatively, you could switch employers or upgrade your skills and find a new career entirely.
For that matter, you could also add a side hustle to earn some extra cash.
Whatever you do, don’t let inflation rise faster than your income if you want to keep improving your quality of life.
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This article originally appeared on GOBankingRates.com: Inflation Is Sticking Around — What It Means for the Middle Class in 2025
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