Author’s note – this article was written in January 2022, prior to Russia’s further invasion of Ukraine. Since then, gas prices have soared to over $4.00 a gallon (with further increases likely), and food price increases are widely anticipated. Inflation is expected to run at around 8% year-over-year as of February 2022, with a potential for even higher rate of inflation over the next few months. Earlier projections of a moderation to inflation over 2022 are now quite uncertain.
Michael and Tiffany Isselhardt moved from Florida to Bowling Green, Kentucky several years ago, attracted by the job prospects in the area and the relatively low cost of living. Tiffany now works as the Marketing and Development Manager for a state museum, while Michael recently joined the IT service department of a major national retailer. The Isselhardts purchased their own home over two years ago, and they refinanced a year later to take advantage of lower interest rates. Despite their success, the last several months of rising prices have forced them to make difficult decisions.
Tiffany relates that they are very concerned. “The biggest impact has been our food budget,” she states, noting that “We’ve gone from spending around $675 a month to nearly $1000 for a household of two.” They’ve seen major increases in food costs, including bread, meat, and many other items. Much more than in the past, they compare prices at different grocery stores.
Tiffany and Michael have dramatically reduced their visits to local restaurants. Still, even these changes have not been enough to offset the increased food costs they incur. According to the Bureau of Labor Statistics (BLS) and its Consumer Price Index for All Urban Areas (CPI-U), food prices rose 6.3% during 2021, with meats, poultry, fish and egg pricing surging 12.5%, while breakfast cereals rose 6.0% and whole wheat bread prices increased by 4.6%.
Michael and Tiffany Isselhardt also saw dramatic increases in their energy bills over the past two years. The cost of their natural gas heating for their modest home rose from $150 a month two years ago to nearly $300 a month today. The rise in natural gas – a 44% price increase nationally in 2021, following a 17% increase the year prior, according to the U.S. Energy Information Administration (EIA)’s January 11, 2022 Short-Term Energy Outlook.
Unfortunately, natural gas exports from the U.S. have doubled over the past two years, leading to higher prices, according to the Institute for Energy Economics and Financial Analysis. Nationally, natural gas prices have increased to $4.38 per million British thermal units, up from $1.63 in June 2020, according to the EIA. The EIA projects only a modest price decline starting in early 2023.
While Tiffany and Michael both have modest commutes, and both drive energy-sipping hybrid cars, the couple has also been impacted by the increase in gasoline prices – up a whopping 55% in 2021. Monthly fill-ups have gone from below $30, to well over $45, for their Toyota Camry Hybrid.
The impacts of inflation have caused Michael and Tiffany to eliminate all of their planned travel, including trips to see distant family members. The costs of lodging away from home increased 23.9% in 2021, with very high prices seen during the summer and holiday peak seasons for travel.
While Michael and Tiffany have never been ones to live paycheck to paycheck, as Michael relates, “We don’t really put money into our savings anymore, and our increased bills have eaten up our savings account. This worries us. One big emergency could tank us.” Tiffany and Michael’s plans to adopt a child have been put on hold “indefinitely,” says Tiffany.
Tiffany notes that a lot of their friends have picked up second jobs to “make it through.” Michael recently changed his job to one with better pay and benefits. Tiffany is hoping for a pay increase to keep pace with inflation and the added responsibilities she has assumed at work, as well as being hired into a permanent position (she is on a year-by-year contract currently).
Will the future continue to be bleak? Unfortunately, Michael and Tiffany’s purchasing power will likely continue to decline in early 2022. Due to supply chain problems which have induced food shortages in many areas, at least for some items, food prices will likely continue to increase in early 2022. However, food prices may significantly moderate in late 2022, with the U.S. Department of Agriculture in its January 2022 Food Price Outlook projected food price increases to 2-3% for all of 2022.
Eating fast foods may, in the short run, turn out to be cheaper for them. Tiffany is quite aware of this, stating: “Our low-income friends rely on the dollar menu or bundled special fare – it’s actually cheaper, in some instances, than trying to cook quality meals at home.”
More pain may arise from rising gasoline prices. According to AAA, as of Feb. 7, 2022 retail gasoline prices nationwide rose from $3.304 a month ago to $3.455 – a 15 cent increase. GasBuddy, an app that tracks fuel prices and energy demand, projects a national average retail price for gasoline exceeding $4 a gallon in June 2022 due to lower U.S. refinery capacity and higher demand.
Overall inflation projections for 2022 are 3.1%, according to The Wall Street Journal’s January 2022 Economic Forecasting Survey. Some items in the “basket of goods” that is used to calculate the overall national inflation average (CPI-U) may decline in price. For example, Jonathan Smoke, chief economist for Cox Automotive recently stated that he expects the Manheim Used Vehicle Value Index to decline just 3% by the end of 2022. But, for Tiffany and Michael, who are not in the market for such big-ticket items this year, such price declines won’t help them much.
In the short term, the Isselhardts’ best hope may lie in salary and wage increases. Like many Americans, without significant increases in their incomes this year, Michael and Tiffany may yet again lose ground to inflation, necessitating further tightening of their belts or taking on additional part-time work.
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Dr. Ron A. Rhoades serves as Director of the Personal Financial Planning Program at Western Kentucky University, where he is an Associate Professor of Finance within its Gordon Ford College of Business.
Called “Dr. Bear” by his students, Dr. Rhoades is also a financial and investment adviser with Scholar Financial, LLC. To request further information about Scholar Financial, LLC’s fees and services, please email AdvisorINFO@ScholarFinancial.com. Thank you.