How Inflation Is Affecting the Average American’s Financial Standing

By John Csiszar

July 13, 2022

Aslan Alphan / iStock.com

Inflation has been mild enough in the United States over the past few decades that many Americans have lost touch with how corrosive it can be. That may all be changing with inflation readings topping 8% on a year-over-year basis in 2022, the highest jump in 40 years. While most Americans realize that inflation raises the prices of everything from gasoline to groceries, many overlook the way it can diminish your overall financial standing. Here’s a look at how inflation eats away at your purchasing power and steps you can take to avoid falling in your financial standing.

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How Does Inflation Affect Americans’ Financial Standing?

According to the U.S. Census Bureau, the median household income in America was $67,521 in 2020. Although definitions of “middle class” vary, you can rest assured that if you’re earning the median income in the U.S. you fall into the middle class. But if you want to remain in the middle class, your income will have to rise over time, due to the effects of inflation. 

A real-world example can make this reality crystal clear. Using the same metrics, the median household income in the U.S. in 1972, or 50 years ago, was just $11,120. In other words, if you kept earning the same amount over the past 50 years, you would have fallen dramatically from the heart of the middle class to well below the poverty line. 

Over the past few years, inflation has been so negligible that even if you maintained your current salary during that time, your financial standing likely remained more or less the same. But with inflation rising sharply in 2022, the value of a median salary is shrinking every day. If the inflation rate remains at 8% annually over just the next three years, the purchasing power of your current salary could be cut by nearly 25%. Depending on how the incomes of your fellow Americans fare over that same time period, you may find yourself pushed out of the middle class just by maintaining your income level.

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How Much You Should Be Earning in 2022

The most recent CPI reading, in May 2022, rose 8.6% on a year-over-year basis. This means that if you were earning $70,000 in 2021, you’d need to earn $76,020 in 2022 just to maintain the same standard of living. That’s a huge jump on an annual basis, but it becomes even more stark when broken down to a monthly level. A $6,020 annual increase in the cost of living means that you’d have to earn about $500 extra per month just to keep your current lifestyle. 

Financial Options for Fighting Inflation

The most traditional way to counteract the effects of inflation is to ask your employer for a raise. This is also usually the best way to beat inflation, by increasing your earnings and maintaining your standard of living. Although rising inflation means that business costs jump as well, many companies can pass those increases through to their customers. In other words, your employer may very well be able to give you a raise if you ask for one.

An additional option to help combat inflation is to get a side gig. In times of low inflation, a side gig could provide enough income to build in a cushion to your monthly budget, perhaps allowing you to beef up your emergency fund or go on a longer or nicer vacation. But in an inflationary period, you might need to pick up a side gig just to keep up. Many side gigs will only generate about $500 per month in income, and in 2022, you’ll need to earn that much just to match the rate of inflation. Thus, you might feel as if you are taking on extra work just to “stand still” financially, so getting a raise from your employer is still a better option.

A third way to “keep up” with inflation is to reduce your spending. However, that will likely result in you feeling as if your quality of life has diminished. Rather than paying more for the things you like, you’ll end up spending the same but receiving less, meaning you’ll still feel the ravages of inflation. 

Why Investing Is So Important

While investing your money might feel risky, when you factor in inflation, the real risk to your money is keeping it in a low-interest savings account. Even if you manage to score a 1.5% APY with a no-fee online savings account, your money is still losing purchasing power to the tune of about 7% per year with inflation at current levels. Investing in a diverse portfolio of real estate, equities and commodities is a time-tested way to help combat the effects of inflation by growing the value of your assets in real terms. 

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About the Author

John Csiszar

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.