Will Inflation Go Down if We Stop Buying Stuff?

How to Minimize the Financial Pinch of Inflation

We’ve been told that mass consumerism is a factor in out-of-control inflation. U.S. retail sales are expected to increase 4 to 6 percent by the close of 2022. Deloitte forecasts holiday sales will total $1.45 to $1.47 trillion during the November through January shopping frenzy. In short, we are suffering from skyrocketing prices, but we still keep spending. This begs the question: are we our own worst enemy when it comes to inflation?

The Basics of Inflation
Inflation is complex, so let’s cut to the chase and look at a couple of real-life examples.

In economics, inflation is a term that represents two components:

A general increase in prices, such as a latte that cost $3 pre-covid that is now $4.50.
A decrease in the purchasing power of money, like a cart of groceries that cost $40 in 1970, now costs $306 for those same items in 2022.

Inflation is expressed as a percentage increase or decrease in prices over a period of time. Using an inflation calculator, we can see that the dollar had an average inflation rate of 3.99% per year between 1970 and today, producing a cumulative price increase of 664.97%.

Inflation is normal, and can even be a healthy part of a growing economy, as long as it does not rise too quickly, as is happening now.

Economists Don’t Agree on Current Inflation Causes
Before we put runaway inflation squarely on our consumption shoulders, understand that economists do not all agree on the root cause of this round of high inflation.

Many point to the perfect storm of conditions that started with consumers spending less during the pandemic, receiving stimulus payments, and socking away money. As Covid-19 eased, households spent more, but supply chain shortages meant a lack of products and raw materials, creating increased demand for fewer products. Throw in the war in Ukraine furthering shortages and a strong labor market increasing buying power. These things combined have created record high inflation and prices.

John Taylor, a renowned economist that literally wrote the book on monetary and fiscal policy, suggests we look back before prices skyrocketed. In Taylor’s opinion, the Federal Reserve set too low an interest rate during the pandemic. This corresponded to a growth of money supply, the amount of cash or currency circulating in an economy. On top of this were the other conditions described above. Taylor believes poor monetary policies created our current inflation crisis.

Even though low interest rates helped contain the economic fallout from COVID-19, what may not have been realistically anticipated were things like investors waiting for a dip in the real estate market who took advantage of these low interest rates. Higher competition in a market already suffering from low inventory caused home values to rise 20%, or much higher in some areas, and rental price increases of nearly 9% nationwide. Prices on essentials from food to gas rose sharply at the same time.

Today’s Inflation
Now that we are in the midst of record-breaking inflation, many economists do agree that slowing consumer spending would help. Ford School economics professor Kathryn Dominguez stated to PBS Newshour: “The issue is getting [consumer spending] to slow down at just the right level, so that, in fact, firms can stop raising prices, households will stop demanding higher wages, and, slowly, prices will start to stabilize.”

If consumers don’t comply, the Fed may keep raising interest rates to lower inflation, which raises prices, until people stop buying. While low interest rates increase money supply, high interest rates decrease the amount of money people are willing to spend. However, if the interest rate rises too high too fast, a recession could be triggered, and put the most vulnerable in our communities further at risk.

Are We Already in a Recession?
By standard definition, the U.S. entered a recession in the summer of 2022, marked by two consecutive quarters of negative GDP (Gross Domestic Product). There is disagreement among economists here too because other indicators of how well or poorly our economy is doing are not following tradition. Even though there is declining GDP, there is rising employment and positive corporate earnings- two indicators of a healthy economy.

So, Will Inflation Go Down if We Stop Spending?
It’s more likely that high prices will drive spending down, rather than the population voluntarily curbing spending to reduce inflation. Collectively, we all have a shared interest in lowering spending. It’s hard to walk back prices on goods and services. We may never go back to pre-pandemic level costs, but slowing the upward price creep would help. Meanwhile, a few changes in spending habits will help balance household finances.

What Not to Buy During High Inflation
Even though retailers are optimistic about this holiday season, a recent survey of consumers predicts a lower holiday spend on nonfood items. Here are some ideas for holiday shopping, and other purchases to avoid:

Lavish holiday gifts. One suggestion is to skip the big-ticket items and focus on experiences or smaller, more meaningful gifts.

Big-ticket items that can wait. Even though supply chain issues have eased, there is still more demand for fewer products adding to high pricing. Here are three items consumers are putting off buying until supply and pricing ease:

Major appliances.
New and used automobiles.
Furniture, including mattresses.

Expensive grocery items. You could lower your grocery bill by reducing meat consumption. Substitute more expensive cuts of beef with ground turkey or chicken. Increasing vegetables and legumes in your diet will not only create further savings, it makes for a more heart-healthy diet. Defer buying gourmet items, and cook more at home rather than going out. If you are stretching the family budget at the end of the month, check out these $5 meals.

Final Note on Where to Stash Your Cash
There are a lot of financial considerations during a volatile stock market and a recession. I am not a financial or investment professional, so during these unusual economic times, it would be a good idea to talk to a certified financial planner. Unlike some financial advisors that may work on commission, all CFPs are held to a strict standard of fiduciary duty, meaning they must put your financial best interests ahead of their own.

Here are some financial items to discuss with your CFP:

Investing for the long term– Taking money out of a long-term investment plan is usually a bad idea, but individual goals may differ, especially if you are close to retirement.
Ask about more secure investments for new money- While you probably don’t want to disrupt long-term investments, think twice about investing large chunks of cash you may have set aside. Talk to your CFP to see if a secure short-term investment, such as a Treasury Bill, would be an option.
Continue investing in your retirement plan- Company sponsored retirement plans have other tax advantages, so again, speak with your CFP before making any changes to contributions.
Hold some cash in interest savings or money market- During uncertain times, like when a recession is looming, it is prudent to keep up to 6 months of household operating cash in an interest-bearing savings or money market account.

Finally, keep in mind that inflation rises and falls and recessions come and go. This too shall pass.