Bank of America Warns Price Hikes Will Continue

A top investment bank says inflation could be here to stay.

There's no hiding from the fact that life has gotten more expensive recently. We've seen  significant rises in the cost of groceries, housing, gas, and everything in between. That's had an impact on how much people can save, the amount of debt they carry, and what they can afford to do.

The inflation that's pushing up our cost of living and eating into our bank balances was fueled by supply chain issues, Russia's invasion of Ukraine, and surging demand. And unfortunately, if the authors of a recent note from Bank of America are correct, those price hikes could be here to stay.

Bank of America says high inflation is the new normal

We don't need Bank of America to tell us that inflation isn't going down. A look at the latest figures shows it is going in the wrong direction. According to September's Consumer Price Index, commonly used as a yardstick to measure price increases, prices are up 8.2% year on year. This slight increase went against expert predictions and hopes.

That figure is particularly disappointing since the Federal Reserve has been raising rates aggressively in an attempt to control inflation. The trouble is that the Bank of America research suggests these rate hikes won't make much difference. It says rate hikes won't dampen the impact of wage increases, high energy costs, and an aging population. 

The report also looks at past inflation figures and argues it will take a developed economy around 10 years to get inflation back to 2% once it's moved above 5%. Inflation in the U.S. breached the 5% mark some time ago and the Federal Reserve's efforts to bring it back down have not yet made much of an impact. 

It's worth bearing in mind that economic predictions are complicated and economists don't always agree. For example, ARK Invest's Cathie Wood said recently she thinks prices will start to fall in the near future. She argues that many businesses have overstocked and will be looking to sell their surplus products at a discount. As consumers, the best we can do is hope she's right, while also preparing for the worst.

How you can handle price hikes

Increasing prices impact our ability to pay the bills, save money, and build wealth. It's particularly difficult to swallow higher costs if you were already living paycheck to paycheck. Indeed, two thirds of Americans surveyed by Forbes Advisor survey said they'd dipped into their savings accounts to deal with the higher cost of living. Others have taken on credit card debt.

If these price hikes are here to stay, the best way to handle them is to find ways to live below your means. That could mean cutting back on your spending or trying to increase your income. The temptation to ignore the problem and hope that prices go back to normal is understandable, but there's a good chance this will cause you more stress further down the road.

Cutting your spending

Believe it or not, cutting your spending doesn't have to involve suffering. Start by looking at what you spend each month. If you're not sure how, try a budgeting app or just sit down with your recent bank statements. Speaking from personal experience, I put off making a budget for much of my life and was amazed at the peace of mind it gave me when I finally figured it out.

You may find you've got monthly subscriptions you don't use or other costs you really won't miss -- you won't know until you look. If there are no easy wins, might you be able to cut your grocery bill by using cash back apps or cutting down on waste? Could you reduce your gas bill by making fewer journeys? Or cut your utility bills by reducing your consumption?

Increasing your income

The other way to ensure you earn more than you spend is to increase your earning power. This could involve asking for a raise at work, looking for extra hours with your current employer, or taking on a side hustle. If you're considering a side hustle or even a second job, make sure it won't damage your standing with your main employment. 

The job market is strong right now, but this could change if we hit a recession next year. On the one hand, having a second income stream could help if you get laid off. On the other, if you're forced to dedicate less time to your full-time work, it may work against you and actually increase your chances of job loss.

Bottom line

Sadly, there are no easy solutions to rising living costs. But if price hikes are about to become our new normal, dipping into savings or taking on debt are not sustainable solutions. Both are only short-term answers that will make it harder to cope with a potential recession. Instead, look for ways to ensure you spend less than you earn. We could be in for a long economic storm.