Setting Yourself Up to Live in a More Expensive World

The concept of inflation is one that many people intuitively understand through their life experience. You can think of just about anything you purchased many years ago, and you would expect that it would cost more to purchase that item now. As we said, the high levels of inflation that occurred in the aftermath of the COVID pandemic seemed to shock people’s conscience to the point that they lost some of their normal perspective on how inflation works. At a base level, inflation simply means that costs tend to rise over time. For many years, pre-pandemic, we were accustomed to inflation that was more manageable. In the 20 years before 2020, the average rate of inflation was 2.2%; however, in the years of 2021 through 2022, the average rate of inflation increased to almost 7%, more than triple the rate of the prior 20 years. With measures taken by the Fed to combat inflation, the average inflation rate in the years of 2023 through 2024 dropped to 3.1%. Through the first 3 quarters of 2025, the annualized rate of inflation has risen to about 3.7% as the economy absorbs the impact of new tariffs that have gone into effect. While the spike to the inflation rate post-pandemic has been hard to take, the rate of inflation from 2000 through 2024 is more in line with historical averages at about 2.6%. Of course, our most recent experience tends to weigh more heavily in our minds, so the fact that average inflation over 25 years is closer to average doesn’t make it easier to deal with costs that are more than 25% higher than they were pre-pandemic. When elected officials or candidates for public office talk about what they will do to make things more affordable, if they are being honest, they can only hope to reduce the rate at which costs increase. The reality of inflation is that in general, prices go up over time. There are some exceptions to where certain costs may decrease on some things for a little while, but anyone who tells you they are going to make costs lower in general, is not being truthful. The best you can expect is that the rate of increase stays at a reasonable level, which according to the Fed is a target of about 2%.

If we accept the fact that things get more expensive as time goes on, there are two ways to manage it: increase your income or find ways to spend less for the things you need (e.g. choose less expensive items, cut some items out altogether). If you’ve asked yourself why the raise you received on your job didn’t seem to give you more breathing room with your cash flow, it may be because you simply received a cost-of-living adjustment (COLA) to your pay. Most employers adjust their employees’ pay via COLA in order to allow their income keep up with the rate of inflation. Note that the intent is not necessarily to help you get ahead, but to keep up. The same can be said for retirement income such as Social Security, that has built in COLAs that are generally applied every year. For retirees who rely, at least in part, on pension income, if that pension does not have a COLA, the fixed nature of that income can cause you to actually have less spending power as the years go on, which is where the concept of living on a fixed income comes from. If you are not in a position where you can control your level of income (i.e. you only have employment income or are a retiree only receiving benefits like Social Security or a pension), inflation can feel much more difficult to manage because increases in your income, if they occur, may only provide minimal relief from increased costs. If you are an employee, what can help you get further ahead is receiving a promotion rather than just a COLA pay increase because those can more significantly raise your level of pay. Alternatively, if you are an entrepreneur or business owner, you may have more latitude to increase your level of compensation because you have more discretion over pay decisions. No matter how you bring in your income, it is important to set expectations for what that income will afford you. It may not be something that you want to do, but taking stock of your overall income picture and matching that to your cash outflow is very important in allowing you to live according to the standard you desire today and in the future. I said cash outflow because you should consider not just your expenses but also what you intend to save.

When it comes to managing your cash flow to cover your expenses, some things are within your control but others are not. Inflation is one of those things you cannot control, other than by participating in the electoral process and electing officials whose policies will be more inflation-friendly. Even then, what an electoral candidate says they will do may be very different from what they actually do, so realistically, your control with respect to inflation is extremely limited. That said, you are not powerless when it comes to managing your lifestyle as things get more expensive. As we said, you can look for ways to lower what you have to spend on the things you choose to purchase. You can also generate more income, which could come with its own set of tradeoffs. If you are an employee who cannot dictate your level of pay, you could consider taking on additional work or monetizing skills that you have through some type of business activity. If you are an entrepreneur or business owner whose compensation is driven by your level of performance, you may be in the most advantageous position to combat inflation because you don’t necessarily have to do anything new to generate more income, you just have to do more of it or do it more efficiently. What is important to keep in mind is that you can pretty much bank on things getting more expensive, so rather than stress out about it, put a plan in place to help you adapt to having to spend more for what you need and want.