Entering adulthood is hard, and inflation is making it even more difficult.
The biggest jump in prices in four decades is greeting Gen Z just as they’re graduating from college, moving out on their own and starting their first jobs. Add in real estate prices that have put home ownership out of reach, plus stocks suddenly cratering after two years of gains, and it’s a brutal welcome to the real world.
“Inflation is challenging for younger generations because they have to bear all the costs of inflation, but don't necessarily own the assets that will help their balance sheet keep pace with inflation,” said Jeff McDermott, certified financial planner at Create Wealth Financial Planning.
For those who haven’t experienced market cycles in the past, this sudden change in the stock market and the economy is especially confusing. To help demystify the world of rate hikes and economic gauges, here are a few common questions answered:
What is inflation?
Technically defined as a decline in a currency’s purchasing power, inflation manifests as an increase in the price of goods and services. It’s not always terrible and can even promote growth, as long as it’s maintained at a relatively low level. In fact, the Federal Reserve aims to keep inflation at a rate of about 2%.
However, the most common measure of inflation in the US — the consumer price index — surged 8.3% in April from a year prior, among the highest readings since the early 1980s. That means it now takes consumers more money to buy the same amount of goods, plus their cash savings are worth less than they were a year ago.
What’s causing it?
It’s complicated. The pandemic caused factories and plants to shut down or produce fewer goods, and disruptions to the supply chain made it more difficult to get those goods to consumers. Meanwhile, Covid stimulus checks and increased savings from months of lockdowns made consumers more willing to spend, particularly as the pandemic eases in many places. That combination, of lower supply and higher demand, is pushing up prices.
The war in Ukraine and resulting sanctions on Russia made the situation even worse by sending prices surging for oil and key food exports like wheat and corn, which is making it more expensive for regular people to fill up their cars, heat their homes and buy groceries.
How do we fix it?
Enter the Federal Reserve. One of its main jobs is to keep prices stable, which it can do by raising or lowering interest rates. Most recently, the Fed increased the benchmark rate by a half percentage point, the biggest hike since 2000. Although inflation declined slightly in April from the prior month, it’s still extremely elevated and the Fed will almost certainly raise interest rates several more times this year. This is prompting fears of an economic slowdown, which is sometimes an unintended consequence of higher rates.
Why is Gen Z hit particularly hard?
Younger people usually have less savings and make a lower salary than their older peers, making it even more difficult for them when everyday necessities like gas and groceries suddenly cost more. Plus, many are struggling under debt from college, with 34% of adults aged 18 to 29 holding student loans, according to the Education Data Initiative. And wages haven’t kept up with inflation, rising just 4.7% in the first quarter from a year earlier.
Gen Zers are also finding that a larger portion of their hard-earned paychecks is going toward housing costs. Rents have surged almost twice as fast so far in 2022 than the year prior, particularly in major metropolitan areas like New York City, where they jumped by 38% in April to a median monthly cost of $3,420 for a one-bedroom apartment, according to Zumper.