How Worried Should I Be About Soaring Inflation?

A couple of weeks ago, I tried to order a chai latte at one of my favorite Upper West Side coffee shops. “Oh no, we ran out of our chai yesterday ... you know, supply-chain issues,” the barista told me.

Supply-chain problems became the almighty boogeyman in 2021 alongside Covid, and now its partner in crime, inflation, is the thing causing anxiety. The Consumer Price Index rose to 7% in December 2021, which is the highest it’s been since the early ’80s. But should the typical consumer be worried about inflation? Although it’s not worth panicking, it is wise to understand how your budget might change.

Inflation is a normal occurrence in which the price of goods and services goes up and the purchasing power of money goes down — your dollar won’t buy as much today as it did a decade or even a year ago. Inflation is the reason it’s critical to invest instead of storing your money under a mattress. Leaving all your money in cash means it essentially loses value to inflation every year. This is bread-and-butter personal finance stuff.

But anxiety may be starker for those of us who have never experienced significant inflation but remember a recession. A prevailing concern, other than not being able to get our chai lattes, is that higher prices are here to hang out for a while — due to both supply-chain issues and labor shortages increasing costs for companies that are then passed on to consumers.

Sustained inflation can lead to a rise in interest rates, which could make it financially difficult for some to buy a home or car. Alternatively, it could mean that some people are currently buying at the top of a bubble in frenzied markets such as housing and used cars.