Spending

67% of Americans now worry about the cost of living, up sharply from 2020

Being able to afford a comfortable retirement is "the No. 1 concern and always will be."

Share
Twenty/20

Inflation is a necessary part of life in a healthy economy. It may not sound pretty, but over time, prices should go up, as wages increase and materials get more expensive. The Federal Reserve Bank even sets a 2% target for inflation to maintain "maximum employment and price stability."

Yet knowing that some amount of inflation is good doesn't make the reality of rising prices any less scary. A recent survey by insurance company Allianz Life found that an increasing number of Americans are worried about how much things cost.

Two-thirds of Americans (67%) said they're worried about the rising cost of living in 2021, an 8-point increase from the 3 in 5 people who said the same thing in 2020. The number of Americans who reported worrying about health-care costs also increased, from 65% to 71%.

Those jumps are statistically significant but they aren't surprising, says Kelly LaVigne, vice president of Consumer Insights and Allianz Life. The pandemic created shortages, and those shortages made people hyperaware of prices. "It seemed like everything was expensive," he says. "There were very few sales because of the lack of availability of many items, and when you got something, it might have been backordered for who knows how many months."

It's likely that inflation anxiety is only going to increase. Last month, the consumer price index — a key measure of inflation — saw its highest jump in more than a decade.

VIDEO4:4704:47
Prices are going up: How inflation can affect you

Video by Courtney Stith

Not just sticker shock but 'expectation shock,' too

For the past decade, inflation has been pretty tame. The last time the consumer price index — which measures the prices of a standard "basket" of goods and services — spiked above 5% was in the summer of 2008, right before the financial collapse. Since then, it's hovered just above the central bank's 2% target, or in some cases, well below it. Even the pandemic didn't do much to broad-based inflation, which stayed well below the Fed's 2% target for most of 2020.

That said, certain staples, like milk, did grow significantly more expensive throughout the pandemic. The average price for a gallon of milk has risen almost 20% in the last two years.

As a result, people were somewhat ready when the Bureau of Labor Statistics reported the nearly 5% jump in the consumer price index last month. While some of that spike is attributable to pandemic-related shifts in demand (the price of an airline ticket, for example, was very different in May 2020 versus May 2021), it was still jarring to experience.

These most recent price figures from the Fed mean consumers and economists alike should be carefully watching out for inflation "in all its stripes," from big stuff like cars and appliances to services like medical procedures, says Mike Skordeles, senior U.S. macro strategist at Truist Financial.

Supply-chain disruptions caused by Covid mean that consumers will not only face sticker shock but what Skordeles calls "expectation shock." "You need a refrigerator, not only is it $500 to $1,000 more than you thought you were going to spend, but, oh, by the way, it's going to take two or three months to get it," he says. "If it's a fancy one, it's going to take even longer."

These worries can all add to Americans' growing sense of anxiety about having enough money coming in to live comfortably, LaVigne says. "Even at a relatively stable 3% inflation rate over a 24-year period of time, the cost of living is going to double," he says. "Can you afford to pay twice as much in 25 years?"

Running out of money in retirement is 'the No. 1 concern'

Regardless of when they start saving for retirement, people worry about running out of money in their golden years, LaVigne says. Those concerns become particularly acute when inflation skyrockets and a dollar doesn't go as far as it used to. "That's the No. 1 concern, and always will be," he says.

The Federal Reserve is keeping a close eye on this current round of price increases. Fed Chairman Jerome Powell has repeatedly stated his belief that this current round of inflation will be temporary, driven by the current shortage of goods and the sudden influx of people spending money on services, like medical procedures, they avoided during the pandemic. Those factors should "resolve themselves" in the coming months, Powell said at a congressional hearing this week.

If you feel like you are at the mercy of rising prices, now might be a great time to consider investing, experts say. In the past decade as a whole, the S&P 500 has beaten the rate of inflation. Even in years when the broad-based index fell, its growth in other years erased those losses.

The traditional suggestion is to invest about 15% of your income, but even starting with small investments in the market can make a big difference, Evelyn Zohlen, a CFP at Inspired Financial in Huntington Beach, California, recently told Grow. "How do you eat an elephant? One bite at a time," she says. "How do you get to the point where you're saving 15% of your income annually? One percent at a time."

Thanks to compound interest, those small investments can eventually lead up to a big safety net as you get older.

"You don't have to sign up for 15% on day one," Zohlen said. "Start tiny, and next thing you know, you'll have eaten the whole elephant."