I was reading this morning that people over 60 are the only ones that have experienced inflation as an adult.
Inflation acts as a tax that reduces your standard of living.
It’s no secret that things cost more now.
What you might not be aware of is how much that’s going to cost you.
In March, Bloomberg ran this article saying that US households face a $5,200 inflation tax this year.
This month a lead Moody’s analyst tweeted that the tax would be $5,520.
Of course, these are averages and your inflation tax depends on how much you spend, which it closely related to how much you earn. The Bloomberg article is nice enough to break down the tax by quartiles but doesn’t say what those are.
I believe these numbers are low as Producer Price inflation is running higher than consumer inflation and those costs will have to be passed along.
Since most people (including many earning $250k/yr) are living paycheck to paycheck, options are few and unattractive.
Because those inflation tax amounts are costs after taxes, that means you’d need to increase your income by about 15% in order to get an after tax (income and Social Security / Medicare) increase to cover the increased costs.
Since it’s not likely employers will be offering 15% increases, that means one or more of the following actions.
Additional job / side hustle
Reduce costs
Increase debt
Increasing debt should be for emergencies only. Also, as interest rates increase, the debt service (monthly payments) increase.
Food costs are going to continue to increase through 2023 even if the Ukraine war ends soon. The combination of drought, high diesel costs, high fertilizer costs, and fertilizer shortages are already in play.
Increased energy costs are here to stay for years as it will take a change of administration and several years of investment to get new energy and refining capacity online.
It’s going to be a rough decade. The sooner you take action to cover your inflation tax, the better off you’ll be.
In case you want to have a better idea of your inflation tax:
These are the quintile amounts from 2019 which will help you find your quintile:
1st Quintile (“Lower Class”): $0 - $28,083
2nd Quintile (“Lower Middle Class”): $28,084 - $53,502
3rd Quintile (“Middle Class”): $53,503 - $86,487
4th Quintile (“Upper Middle Class”): $86,488 - $142,500
5th Quintile (“Upper Class”): $142,501 or more in household income
The inflation tax amounts from Bloomberg are:
1st Quintile: $2.275
2nd Quintile: $3,199
3rd Quintile: $4,529
4th Quintile: $6,139
5th Quintile: $10,062
Remember:
You’re spending in after-tax dollars
2023 inflation increase will be in addition to the 2022 increases.
If inflation were calculated the same as back then, the current inflation rate would be 17%. That means nearly double the costs in this post.
Check out my post on energy: