Inflation is at the forefront of everyone’s mind as the price of gas, groceries, and other necessities rises steadily. As most salaries do not increase to match the rate of inflation, family finances can take a huge hit. You may be wondering how policies can work in your favor or against it. Let’s discuss.
The History of Inflation on Family Finances
Inflation has caused problems with family finances in the past and policies have been enacted to mitigate those effects. However, policies that affect family finances don’t always take inflation into account, making it difficult for said programs to remain at the forefront of helpful solutions for families.
As of November 2021, the United States inflation rate was around 4.7%. The last time inflation was that high was in the year 1990, when the rate was 5.4%. The Center for American Progress explains, “The Federal Reserve has responded to rising inflation by raising interest rates to reduce demand for goods, services, and labor. If interest rates are raised enough, output and employment will be reduced, price and money wages changes will slow, and, eventually, core price inflation will be reduced.”
An increase in interest rates has been the standard response to inflation for many years. In 1990, interest rates increased significantly as a result of inflation and economist Alan Greenspan introduced many policies that were intended to aid the situation. His attempts to drastically lower interest rates in order to help inflation is now referred to as the “Greenspan Put.”
An example of a policy designed to work with inflation today is the Child Tax Credit of 2021, which was put into play with the intention of lowering the child poverty rate. Regardless of inflation levels in 2022, the amount of money families receive from the Child Tax Credit is currently slated to stay the same. Some argue the amount should rise to account for inflation. Federal minimum wage is another example of a policy that does not change over time despite inflation.
On the other hand, consider Social Security benefits. Currently, retirees receive benefits that are intended to increase proportionally with inflation rates. This is called “indexing.”
Today’s Impact of Inflation on Family Finances
Some policymakers push for indexed financial aid programs from the government. Others believe indexing increases the poor effects of inflation. As you consider your own family finances, you may find yourself impacted by whether or not policies are enacted to index certain policies or not.
Policymakers present their plans to lower inflation costs and it’s up to you to decide which plan to support, if any.
Current Examples
One example of policies meant to positively impact families is in the Build Back Better agenda proposed by President Biden in 2021. The purpose of the policy was to aid families and help those with children. The Build Back Better act involves setting a cap on the cost of childcare and providing all parents with paid family leave. While some are in favor of this policy, others highlight potential drawbacks.
Another current example is the debate regarding whether to extend the Child Tax Credit. Policymakers looking to assist low and middle income families with finances have proposed the Child Tax Credit be extended in order to mitigate the costs of childcare and loss of income associated with such. With many such programs, there is debate about the efficacy of such initiatives and how the government funds them, and what potential future increases such programs may have on income tax.
Questions to Ask Yourself
As you consider which inflation policies you may want to potentially support, there are several key factors to consider. First and foremost, take stock of your own family finances and the finances of those you care for—be it as dependents or not. Think of what grocery, gas, rent, and utility prices will look like if inflation continues to rise exponentially. With levels of inflation at record highs compared to previous years, your own family’s finances and personal situations can help you know which policies you may want to place your support behind.
Next, consider the policies presented by those in positions of authority. As you determine which to support, ask yourself which ones offer the most helpful aid for your situation and which would provide the most financial relief. Then, if your decision still hasn’t been made, consider the local economy and other policies that may reduce inflation.
Lastly, research inflation on both the regional and national levels. Doing so will help you be prepared for potential outcomes of inflation and give you perspective on the policies in place both in your community and in the country at large.
Inflation is a constant, but as most family finances take a hit for the worst under these record-breaking numbers, considering which policies you should lend your support to is crucial.
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