The Impact of Inflation on MillennialsNovember 8, 2022
For millennials, it seems like there’s always a financial crisis. Millennials experienced the dot-com bubble, the Great Recession of 2008, rising tuition rates, COVID-19, and now they’re dealing with skyrocketing inflation rates.
In the past, inflation was the one thing millennials haven’t had to worry about; inflation has been relatively low. Since 2005, the inflation rate has been under 4%. But as of September 2022, the inflation rate was 8.2%, meaning the price of everyday consumer goods like food and housing has significantly risen over the past 12 months.
Millennials — people born between 1981 and 1996 — are particularly impacted by rising inflation. If you’re worried about higher prices, here’s what you can do to protect your money.
What Is Inflation?
To understand inflation’s impact on your daily life, you must understand what inflation is and how it’s measured. Inflation is the rate at which the prices of goods and services increase. Economists and analysts usually measure inflation using an index of a particular economic sector.
Usually, people reference the Consumer Price Index for All Urban Consumers (CPI-U) to measure inflation. The CPI-U covers about 88% of the urban population in the U.S. The Bureau of Labor Statistics compiles the CPI-U monthly to track how inflation impacts different sectors of the economy, including housing, transportation, food and beverages, apparel, education and communication, and medical care.
Some level of inflation is necessary. In general, the Federal Reserve aims for the inflation rate to stay around 2%. When the inflation rate exceeds that number, it can have significant implications for the economy, including business closures and layoffs.
How Does Inflation Affect Millennials?
Millennials are entering their 30s and even their 40s now, meaning they are at the age where they make up most of the workforce. They’re also raising their own families, so they have higher expenses than other age groups. With rising inflation, millennials face the following issues:
Millennials May Struggle to Buy Homes
With high inflation rates, housing is increasingly unaffordable. According to Redfin, the median rental was over $2,000 per month, while the median sales price was over $400,000. Whether millennials are looking to buy or rent a home, they may find they cannot afford the prices.
And with inflation pushing the cost of everyday essentials higher, millennials may find that they have less room in their budget to save for a home or an emergency fund. For many, the higher inflation rates may cause them to delay purchasing a home, or millennials may relocate to less expensive areas.
They May Cut Back on Investing
Everything from groceries to utilities is more expensive. Millennials may decide to reduce or stop their retirement contributions to make ends meet. A 2022 Ally survey found that 49% of millennials said they sold investments or closed investment accounts.
That’s a risky decision; savings accounts won’t earn enough interest to offset higher inflation rates. And without investing, millennials will struggle to afford the necessities once they retire.
Millennials May Have a Harder Time Affording Student Loans
Since March 2020, millennials and other student loan borrowers haven’t had to worry about paying their federal student loans, and interest hasn’t accrued on those loans either. But in January 2023, payments will resume.
Budgets stretched thin by inflation will be strained even more by student loan payments. Millennials may struggle to pay their bills and student loans and are at risk of falling behind or even defaulting on their loans.
It May Cause Them to Job Search
Because inflation has pushed prices up, millennials are looking for ways to boost their spending power. Because wages have stagnated and annual raises aren’t keeping up with inflation, many millennials are looking for new jobs that offer higher salaries.
Some may also start freelancing or side hustling to supplement their income and make ends meet. Millennials may even go back to school to get a degree that will qualify them for a higher-paying job.
With millennials looking for other work, turnover may be more common, making staffing an issue for businesses.
How to Manage Rising Inflation
There’s no doubt about it; inflation is a serious problem. If you’re a millennial worried about inflation, here are some things you can do to protect your finances:
- Cut Spending: To afford essentials and pay your bills, you may need to cut back on spending. If you’ve already created a budget and cut every corner you could find, you may need to take more drastic measures. For example, you could relocate to a cheaper area, get a roommate (or two), or downsize to a less expensive car.
- Boost Your Income: One way to combat rising inflation is to make more money. If you can get a raise at your current job, that’s ideal. But if not, you may need to look for a new job that pays more. You could also start freelancing or side hustling to bring in extra cash.
- Pay Down Debt: If you have high-interest credit card debt or loans, focus on paying those off as quickly as possible. The more debt you can pay off, the less interest you’ll have to pay and the more money you’ll have available to cover other expenses.
- Keep Contributing to Your Retirement: Money may be tight, but it’s still critical that you contribute to your retirement fund, especially if your employer will match a portion of your contributions. Without the power of compound interest, your money will be worth less and less, so investing is key to retiring comfortably. Look for other areas in your budget to trim or creative side hustle to increase your income so you can keep up with your retirement contributions.
- Refinance High-Interest Debt: Depending on the type of student loans you have and when you took them out, your student loans may have very high-interest rates. If that’s the case, student loan refinancing could help you secure a better rate and lower your monthly payments, freeing up cash for other goals.