How Will Inflation Impact Your Holiday Spending?

Record inflation has been consuming the headlines and our pocketbooks this year. And with the holidays approaching, consumers are bracing for more price shocks as they stress over their already stretched budgets. However, while high inflation has the potential to impact just about every aspect of our lives, we don’t necessarily have to let it. It comes down to our personal choices about how we spend our money.

Inflation Remains Stubbornly High, but Bright Spots are Emerging

Although the inflation rate has been ticking down from its 9% high in June, it remains stubbornly high at 7.5% in October. Consumers continue to pay more for essential goods than a year ago. On a year-over-year basis, food and energy prices continue to lead the way with double-digit increases, though they have eased somewhat in the last several months.

The shifting demand from goods to services is also reducing inflationary pressures on durable goods. In fact, due to the normalization of supply chains and falling demand, prices of various goods have fallen relatively significantly. Commodity prices have been trending lower for several months, reducing pricing pressure on durable goods, which had been the primary cause of surging core inflation.

What does that mean for consumers? Through August of 2022, the prices of some electronics, such as televisions, video equipment, smartphones, and telephone hardware, have fallen double digits. Driven by declining gold and silver prices, jewelry is also more affordable than it was a year ago. Gold is off 6% from a year ago, and silver has come down 14%.

For sports enthusiasts, the cost to attend sporting events is off by nearly 11% from last year. Though airline fares remain elevated, the cost of travel overseas is less expensive due to the strong dollar. New car prices are starting to decline but used car prices are down 11% over the last year.

After rising sharply since 2020, energy prices have steadily declined since June. The energy price index has fallen 7.5% since October, though it is still up more than 18% from a year ago.

While this may be considered cherry-picking, it shows that some goods consumers want to buy are bucking the inflation trend. It also shows that consumers can control the impact of inflation on their households by cherry-picking the products they buy.

What’s Your Household Inflation?

For most American households, the government consumer price index (CPI) is not their reality. Their “household” inflation, based on their lifestyle choices, is a more realistic measure of rising prices for each family.

When measuring the monthly CPI, the Bureau of Labor looks at the prices of nearly 80,000 items divided into more than 200 categories. Those categories are folded into eight broad categories, including foods and beverages, housing, apparel, transportation, medical care, recreation, education, and communication. That’s called the CPI market basket of goods. However, the CPI market basket of goods does not necessarily represent a particular household’s basket of goods and services.

For example, energy prices are a contributor to the CPI. If you work remotely or commute to work by public transportation, your household isn’t as impacted by rising energy costs. Or, if you stop eating out (another component of the basket), your food costs won’t increase as fast. Choosing chicken over beef will keep a lid on your household inflation.

Household Inflation Controlled by Spending Habits

As difficult as it may be, consumers should ignore headline inflation and focus entirely on their household spending because that’s what they can control. While it’s impossible to completely dodge rising prices, focusing on goods with more stable or declining prices makes it possible to keep your budgets from breaking.

When it comes to holiday spending, consumers can exert that same control. While your holiday budget may not go as far as it has in the past, the key is making wise choices—shopping for discounts, using rewards points, and focusing on products such as electronics that have come down in price this year. And by all means, avoid trying to stretch your holiday budget by going into debt. Otherwise, you will definitely be paying higher interest rates than last year.