Cost of Living Getting More Costly

You don't need to track reported inflation figures to know when a paycheck doesn't last as long as it used to.

If Al Roker, host of the TV game show Celebrity Family Feud, asked his contestants to name ways to adjust to an inflationary economy, there'd likely be only two acceptable answers: cut back on spending, and charge more on the credit cards.

Cost of living story in numbers

According to the U.S. Department of Labor, consumer prices rose at a seasonally-adjusted, annualized rate of 7.9 percent between April and June. During the same time period, the energy index advanced 53.6 percent, while the food index showed an 8.5 percent gain.

These reported inflation figures sound grim, but a statistic published by First Command Financial might be even more telling. The Financial Behaviors Index, which has a base value of 100, surveys consumers monthly on their attitudes, intentions, and behaviors with respect to their household finances. In recent months, the index has reflected the financial roller coaster ride consumers have been on this year. In March, the index came in at 117, signifying consumer optimism about meeting household financial objectives. First Command Financial believes that the optimism was primarily related to the federal economic stimulus program. But the June figures show a marked change in attitude: the index fell to 88, indicating a prevailing sense of consumer pessimism. The rising cost of living is thought to be the culprit; as food and gas prices spike, households are increasingly unable to meet their own goals of debt reduction and savings growth.

When the cost of living goes up, savings contributions go down. And if that doesn't alleviate the cash flow crunch, consumers start dipping into their savings, or charging on their plastic. Recent economic data seems to support this. In June, average short-term household savings totaled almost $700, significantly lower than the $1,133 figure reported in March. And in May, nationwide revolving debt reached an all-time high of $962 billion, even as credit card issuers attempt to reel in big credit lines and get more restrictive in their underwriting. Experts believe that consumers are more frequently using credit cards to pay for increasingly expensive necessity items like food and gas.

Double the trouble

Consumers who tap their credit cards and savings to deal with the escalating cost of living increases generally end up digging a bigger hole for themselves. Debt costs will increase, and credit limits will be maxed out. As savings dry up, it will get harder and harder to cover expenses every month. And, since equity debt is no longer widely available, debt-ridden consumers have fewer opportunities to consolidate and restructure their finances.

There's no way around it: times are tough right now, and they may get tougher down the road. If you can win a game show to raise cash, go for it. Otherwise, you'll have to buckle down on spending and be selective about when you pull out your credit card.