Living with inflation: UArizona expert talks strategy in a time of economic uncertainty

Woman filling up at the pump


University of Arizona researcher Rick Rosen doesn't mince words when it comes to inflation and the specter of recession: It's going to be rough, he says.

But Rosen, an associate professor and former chair of the Personal and Family Financial Planning program in the UArizona College of Agriculture and Life Sciences' Norton School of Family and Consumer Sciences, says the economy will recover and may even come back stronger. In the meantime, there are actions people can take to protect themselves financially.

Richard Rosen

Richard Rosen, associate professor of personal and family financial planning in the College of Agriculture and Life Sciences

"Recessions aren't necessarily bad," Rosen said. "People tend to become a little more realistic in what they're about and what their spending habits are. Companies tend to be a little more realistic about employment, purchasing of new equipment and plants. But it's painful to get there. That's what we're going to start experiencing."

Anyone who has recently filled up their gas tank or gone to the grocery store has felt the effects of high inflation, something this country hasn't experienced for decades, Rosen said. When the inflation rate is higher, purchasing power is lower, meaning people are spending more but getting less.

So, how did we get here?

Pent-up demand, backed-up supply

The bottom line is people spent less during the pandemic, Rosen said. As the pandemic eased, many Americans were ready to spend their accumulated cash, but there was a problem.

"The supply chain was a mess," Rosen said.

Manufacturing countries, like China, shut down entire cities to battle COVID, causing worldwide shortages of goods and raw materials. Companies throughout the supply chain laid off large percentages of employees, including warehouse workers, truck drivers, manufacturing line workers, salesclerks, airline pilots and every other type of employee imaginable, Rosen said.

"So, now, who's going to actually build that product?" he said. "Who's going to ship that product, who's going to deliver that product and who's going to work in the stores?"

"People had all this money, they wanted to buy things, and there simply wasn't enough supply to go around," Rosen said. "This is Economics 101. Way too much demand and way too little supply, all driving up prices."

Then, Russia invaded Ukraine. Sanctions against Russia from countries all around the world disrupted oil and gas supplies, while at the same time a Russian naval blockade of Ukraine stifled the export of wheat and coarse grains, causing food shortages and higher prices in much of the world, Rosen said.

"This is not an easy fix," he said. "It's going to take time."

Next steps for the economy

Rosen said the Federal Reserve – an independent arm of the government, not a political body – has two key tools at its disposal to fight inflation: the federal funds rate and reserve requirements for banks.

The funds rate affects the cost of borrowing for banks, which borrow money nightly from the Federal Reserve so they can pay their bills, Rosen said. The higher the rate, the higher the cost for banks to borrow. Banks pass on that "cost of money" to businesses and individuals, and they also cut back on providing loans, leading to a decrease in spendable assets for businesses and individuals.

In June, the Federal Reserve boosted the rate by 0.75 percentage points, the highest jump in 40 years. They did the same in July, so that it now stands at 2.5%, and increases are expected to continue into the fall. A year earlier, the overall rate was a mere 0.25%.

"The cost of money is becoming more expensive," Rosen said. "The goal is to pull money out of the economy … to stop businesses and individuals from spending."

The other tool, reserve requirements, requires banks to hold a certain percentage of their money as reserves, mostly against bad debt, meaning it cannot be loaned out, Rosen said. The dilemma, he said, is figuring out how far you can tighten down inflation without sending the economy into a freefall.

As it is, Rosen and many economists believe a recession – when the value of goods and services the nation produces, or gross domestic product, declines for two consecutive quarters – is inevitable.

Rosen pointed to already visible signs of economic trouble, such as the drop in the stock market, the skyrocketing cost of buying or renting a home, and large firms like Revlon filing for bankruptcy protection because of supply chain issues.

More troubles loom, he said.

"Inflation hurts you and me; we go to the gas pump and, believe me, we feel it," Rosen said. "Now, imagine companies: They have to buy goods, equipment, plants and operating materials, plus they have to pay employees. The cost of insurance is going up, the cost of wages is going up, and the cost of benefits is going up. Ultimately, that domino effect will require businesses to shed employees, hold off on purchases of plants and equipment, and increase prices on goods and services to be sold to the public."

What actions can consumers take?

To understand the threat inflation poses, consider this: Nearly six in 10 Americans already don't have enough savings to cover a $500 or $1,000 unexpected expense. And with inflation increasing, the overall cost of that "unexpected expense" is also increasing.

Rosen suggests consumers focus on three big areas to limit their expenses: oil and gas, food, and shelter. Some of the actions may seem obvious, but they still require discipline and changes in lifestyle.

"Gas is $5 a gallon, so what do you do?" Rosen said. "Try not to drive as much."

That could mean mapping out a route and running errands all at once instead of making a lot of separate trips. It could be riding a bike or walking to work, at least when it's not 110 degrees outside. Or carpooling or using public transportation. If the job allows it, ask to work, or continue to work, remotely.

At home, it may be time to get a little uncomfortable, Rosen said.

"Instead of having your house's air conditioning at 68, move it up to 78," Rosen said. "Reverse that during the winter. That's the time to put on a wool sweater, to put on wool socks. You can't afford to heat or cool your house at the costs we're going to see, and it's going to remain astronomical for quite some time."

Rosen said the same goes for eating at restaurants.

"I know that hurts some people, but let's face it, we just went through COVID, where we didn't go out to eat at all," he said. "We're going to have to learn to eat and entertain differently."

Regarding housing, Rosen said this is probably not the right time to buy a house, with interest rates on the rise and prices still high because of the COVID slowdown in homebuilding and supply chain issues.

"Hunker down, do your own fixing and repairing of things," Rosen said.

Caution with credit cards is also advised.

"If people are going to start borrowing money on their credit card and not have the ability to pay beyond the minimum payment each month, they'll never get out from underneath that," he said.

On the flip side, if people have extra money, they could pay down their credit card debt or even put money into the stock market, while prices are relatively low.

"Now is not the time to sell," Rosen said. "Keep putting money in."

The bottom line for most people, Rosen said, is that living with high inflation and a tumultuous economy requires a change of mindset.

"You start to realize that everything is connected. The best advice I can give is to realize inflation is here, and it's going to be here for a while," Rosen said. "And you have to do everything within your power to save where you can."