Inflation surges at fastest rate in decades: What it means for you

CPI data shows that consumer prices have risen 7% in the past year, which is the fastest rate of inflation since 1982. (iStock)

Inflation soared at the fastest annual pace in nearly 40 years in December, according to the Bureau of Labor Statistics (BLS).

The Labor Department's consumer price index (CPI), which measures expenses like food, shelter and new vehicles, found that prices rose 0.5% last month and 7% over the past year. This is the fastest pace of price growth since 1982.

The rise in inflation was driven by significantly higher prices on a number of necessary consumer expenses. Energy costs are up 29.3% since December 2021, while the price of used cars and trucks rose 37.3%. The cost of food rose 6.3% in the past year, although these prices are now increasing at a slower monthly rate. And the cost of shelter, including rent and mortgage payments, increased 4.1% year-over-year.

Separately, hourly wages are hardly keeping pace with rising inflation, the BLS data showed. Average hourly earnings increased 0.6% in December but are offset by the 0.5% growth in consumer prices, bringing the real earnings increase to 0.1%.

The CPI data is closely monitored by the Federal Reserve, which is expected to implement multiple interest rate hikes in 2022 to combat persistent inflation. Keep reading to learn more about what's causing inflation, as well as what you can do to handle rising prices. If you're interested in taking advantage of today's interest rates, you can visit Credible to compare rates on a number of financial products for free without impacting your credit score.

SOCIAL SECURITY BENEFITS SEE HIGHEST BOOST IN 40 YEARS, BUT INFLATION IS HIGHER

Why is inflation so high?

The current rate of U.S. inflation stems from the robust economic recovery after the unforeseen economic downturn caused by the pandemic. In the early stages of the pandemic, businesses halted operations and unemployment skyrocketed. But the American economy swiftly regained strength amid emergency measures from the Fed, stimulus spending by the federal government and vaccine distribution.

Consumer demand for goods and services suddenly spiked as Americans were given stimulus cash, but businesses struggled to keep up with demand after being hobbled by the economic disruption. This resulted in supply chain issues, labor shortages and increased wages, and businesses had to increase prices to offset higher operating costs.

Increased government spending also plays a part in inflation. The Federal Reserve Bank of San Francisco recently wrote that President Joe Biden's $1.9 trillion American Rescue Plan (ARP) further contributed to inflation by providing "fiscal support during a strong economic rebound."

And inflation isn't just a problem for American consumers. The Pew Research Center found that consumer prices are rising worldwide, although the United States had the eighth-highest inflation rate in the third quarter of 2021 of all countries examined in the study. The fact that inflation is happening globally indicates that the COVID-19 pandemic has had a widespread economic impact, and consumers are bearing the brunt of rising prices.

MBA ECONOMIST SAYS INFLATION NOT TRANSITORY: HERE’S WHAT THAT MEANS FOR INTEREST RATES

3 ways consumers can combat surging prices

Economists predict that inflation is here to stay. While Federal Reserve Chair Jerome Powell previously said that inflation was transitory, the head of the central bank in November said that it's "probably a good time to retire that word" amid persistent rising prices, according to Reuters.

As inflation continues to surge, here are a few ways to offset higher costs:

Refinance debt before interest rates rise
Consider buying a home rather than renting
Make your home more energy efficient

Read more about each strategy in the sections below.

AS INFLATION RISES AT RECORD PACE, WHAT IMPACT COULD BIDEN’S BUILD BACK BETTER PLAN HAVE?

1. Refinance debt before interest rates rise

The Fed's pandemic-era economic policies caused interest rates on a number of financial products to fall to record lows in 2021. But amid persistent inflation, the Fed is revising its economic policy to include multiple benchmark rate hikes in 2022.

When the Fed begins implementing these rate hikes, interest rates will also rise on other consumer borrowing products, including mortgages. Of note, 30-year mortgage rates plummeted to unprecedented lows in January 2021, but they’ve consistently risen in the year since.

Still, mortgage rates are forecasted to rise much further in the next year. The Mortgage Bankers Association (MBA) predicts that the average 30-year mortgage rate will reach 4.0% in 2022, up from 3.1% in 2021. This means that time is running out for homeowners to refinance their mortgage debt at a historically low rate.

Mortgage refinancing can also be beneficial for consumers who are looking for ways to save money amid inflation. Refinancing to a lower interest rate can reduce your monthly mortgage payments, which can free up room in your household budget.

If you're considering refinancing your mortgage, it's important to act before the Fed begins raising interest rates. You can begin the mortgage refinancing process on Credible and compare offers across multiple mortgage lenders at once.

AVERAGE HOME INSURANCE RATES ARE RISING FASTER THAN INFLATION

2. Consider buying a home rather than renting

The CPI shows that housing costs have risen 4.3% over the past year, but this can have a much more significant impact on renters over time. That's because homeowners are able to lock in their monthly mortgage payments over a longer period of time, whereas rent may increase multiple times over the course of several years.

Median rental prices in the United States rose from $1,659 to $1,858 between October 2020 and 2021, according to the Zillow Observed Rental Index (ZORI). That's a 12% increase in just one year — and some landlords may implement rent increases each time a tenant renews their lease.

Although home values are near all-time highs, buying a home can help consumers plan for a more consistent housing payment over a longer period of time. If you're considering buying a home, use a mortgage payment calculator to see if it's worthwhile. You can start shopping for a mortgage by comparing rates for free on Credible.

FANNIE MAE: RISING HOME PRICES COULD DRIVE INFLATION INCREASES FOR YEAR AHEAD

3. Make your home more energy efficient

Energy costs skyrocketed 29.3% in the past year, according to CPI data. That includes a 41% cost increase on fuel oil and a 24.1% increase on utility gas services, which are used for heating homes and powering kitchens. Here are a few ways to make your home more energy-efficient so you can reduce your energy costs:

Add insulation to your attic and crawlspaces
Install rooftop solar panels
Switch to energy-efficient appliances
Replace gas kitchen equipment
Upgrade your HVAC system

Although these home improvements may pay off in the form of long-term energy savings, they can come at a high upfront cost. There are a few ways to finance home renovations, including cash-out mortgage refinancing. You can learn more about mortgage refinancing on Credible and determine if these home upgrades are worth the cost.

3 WAYS INFLATION IS IMPACTING YOUR WALLET, AND HOW TO COMBAT RISING PRICES

Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at moneyexpert@credible.com and your question might be answered by Credible in our Money Expert column.