How to Ease Inflation's Squeeze

The uptick in companies' production costs is due to hit consumers in the near future. Here are some simple ways to minimize the impact

By Amey Stone

While the Federal Reserve remains focused on fighting an upturn in inflation -- two Fed governors vowed continued vigilance on Oct. 18 -- American families had better start waging their own inflation battle at home (see BW Online, 10/20/05, "Investments That Fight Inflation Fears").

The latest government data show that although inflation isn't hitting consumers that hard now, it's likely to ramp up in the months to come. That's because the cost to companies for raw materials and parts they use to produce goods is rising far faster than prices paid by shoppers at retail. In September, producer prices increased 1.9%, while consumer prices gained 1.2%.

Consumer prices are likely to catch up eventually, say economists. "I'm not a big inflation hawk," says Dean Baker, co-director of the Center for Economic & Policy Research in Washington, D.C., "but consumers are almost certainly going to be paying more."

Here's a list of budget items facing the biggest price spikes -- and what you can do to keep your own bills down:

Gasoline: At $2.72 a gallon nationally, the price of gasoline is down 12 cents in the past week -- but is still 69 cents higher than a year ago, according to the government's Energy Information Administration (EIA). You've probably heard plenty of wisdom on how to trim your gas consumption -- consolidate trips, carpool, and keep your tires fully inflated.

Here's another idea: Before you fill up, check out, or a similar local Web site that lists the cheapest places to buy gas in your area. Better yet, if you're ready to go alternative, consider buying a hybrid or even a diesel car.

Home Heating: Mainly due to disruptions to the fuel supply from hurricanes Katrina and Rita, this winter homes heated by natural gas will face a 48% higher fuel bill and homes heated by oil will deal with a 32% increase, according to Oct. 12 EIA estimates. If it's an extra cold winter, bills will jump even more than that.

Job No. 1 is to make sure your home is well insulated and leaky windows caulked. Keep your furnace set for 68 degrees Fahrenheit during the day and 62 at night, recommends the Citizens Utility Board of Chicago. You can get a timer for just $20 or so that will automatically turn down the heat when you're gone during the day or go to bed at night.

Electricity Bills: Average electricity prices are expected to rise 6% to 8% this year -- which sounds like a bargain compared to gas and heating bills. But there are still lots of ways you can and should save on your electric bills. Here's one: Go ahead and splurge on a trendy, expensive European appliance -- many of them, like the Bosch front-loading washing machine, are also very energy efficient. (For more, see BW Online, 6/1/04, "Lean Green Tips for Energy Saving".)

The level-payment plans offered by many electric companies can help you budget for higher prices. But you'll pay just as much in the long run (see BW Online, 9/21/05 "Cold Comfort for Natural Gas Users").

Groceries: Food prices jumped 1.4% at the producer level in September. We all need to eat, but if you currently shop at expensive stores, you can cut your grocery bill by going discount. Crave gourmet treats from Whole Foods (WFMI ), for example? Consider buying your staples elsewhere. A BusinessWeek comparison found that prices of items like milk, toilet paper, and soda were often much higher at Whole Foods than the local supermarket (subscribers, see BW, 10/24/05, "How Whole Foods Prices the Staples").

Or you could load up on cheap goods at warehouse stores. If you don't have room for bulk in your home, check out discounters like Trader Joe's or even your local dollar store -- increasingly they sell cereal, spices, canned, and paper goods (although not always for $1).

Mortgage Rates: As interest rates rise, mortgage rates are ticking up. According to, the average rate for a 30-year fixed mortgage reached 6.1% on Oct. 13, up from 5.8% on Sept. 7. That means the monthly payment on a $165,000 mortgage is now $1,000, up from $968 in early September.

Despite the uptick, Baker's best advice is for holders of adjustable-rate mortgages to refinance into a fixed-rate loan before rates go even higher. "Some people might say, 'I lost my chance,' now that rates are over 6%," he says. "But 6.1% is still a very good rate in the scheme of things."

Rising mortgage rates are likely playing a role in a cooling housing market. For strategies for dealing with a real estate market that may be topping out, see BW, 8/15/05, "Steering Clear of Bubble Trouble."

Airfares: Brace yourself for peak holiday fares that will spike higher than usual as airlines deal with rising fuel costs. Book as early as possible, be flexible about times and dates, and be sure to comparison shop online (see BW Online, 10/10/05, "Airfares: Avoiding the Takeoff").

Tuition: According to the College Board's report on trends, released Oct. 19, tuition costs increased 7% at four-year public colleges and 6% at private ones this academic year. Last year, average costs increased 10%, and in 2003 they increased 13%.

While it's great that price hikes are slowing, college is still getting more costly. The bottom line: Parents and students need to make sure they pick the right school to get the best bang for their education buck (see BW Online, 6/7/05, "Higher Ed's High Finance").

Health-Care Costs: Like education costs, health-care cost increases are slowing. But medical spending is still putting a major dent in the family budget. Now that it's benefit-enrollment season, make sure you have all the right coverage (see BW Online, 11/1/04, "Health-Care Options: 10 Tips"). Also, buy generic drugs whenever possible, and review your medical bills carefully to check for errors, advises Baker.

Most of the best inflation-fighting tips are basic common sense. The real trick to saving money as prices rise is to actually put all those good ideas into practice.

Stone is a senior writer for BusinessWeek Online in New York

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