Prices are rising at a pace we haven't witnessed in four decades. It's hard to avoid panicking when your paycheck doesn't change, but food, gas and other prices are higher every time you pull out your wallet. However, you can beat inflation in 2022 with smart spending, saving and investing strategies. Here's how.

What Is Inflation?

The inflation rate is the rate at which the prices of goods and services increase. Inflation degrades the value of your savings and reduces your purchasing power.

How do we calculate inflation?

The Consumer Price Index (CPI) is the most widely used measure of the inflation rate. The U.S. Bureau of Labor Statistics (BLS) measures price changes faced by urban consumers, who represent 93 % of the U.S. population. It analyzes prices for 80,000 items and services including gasoline, groceries, medical appointments and entertainment. The Consumer Expenditure Survey determines what Americans buy and how much we buy. Prices are weighted according to how important it is to the average American. For example, we spend more on chicken than on tofu, so changes in the price of chicken impact the CPI more.

How Does Inflation Affect Debt?

Inflation makes new loans more expensive because it raises interest rates. But how does the inflation rate affect the debt you already have?

That depends. If you have variable-rate loans, such as most home equity lines of credit (HELOCs), the interest rate on your balance (and your payment) is likely to increase. The same is true for adjustable-rate mortgages (ARMs). Fortunately, you're probably protected from a sudden, unaffordable increase by interest rate caps.

Ceilings restrict the interest rate on variable rate loans in two ways:

A lifetime rate cap and an adjustment cap. The adjustment cap limits how high an interest rate can go during a specific adjustment period. A 2% cap for an annual adjustment is common. And a lifetime cap sets the maximum rate on a loan. A common cap is 6% above the loan's starting rate.

What about credit cards - does the CARD Act protect consumers from interest rate increases on balances? Arbitrary credit rate increases apply only to new purchases and you must receive 45 days' notice before they take effect. But rates charged on existing balances can increase at any time when the change is due to a variable indexed interest rate. And almost all credit cards have variable indexed interest rates.

As the Federal Reserve raises short-term interest rates, rates on any product tied to a financial index such as the prime rate will also increase. And credit card issuers do not need to give notice of these increases.

On the other hand, if you have a mortgage, auto loan, student loan, personal loan, home equity loan or line of credit with a fixed interest rate, your interest rate and payment will not increase. You will be protected from inflation.

How to Beat Inflation When in Debt

If you have many variable rate debts, list them and prioritize them in order of potential damage (high variable rate accounts should take priority over lower variable or fixed rate accounts). If you have variable rate loans with an option to fix the interest rate and you can't pay off the balance quickly, consider converting them, even if the new rate is higher.

Try to pay off as much high-interest or variable-rate debt as possible. The two most popular strategies for debt acceleration are the debt avalanche and debt snowball methods.

If you can't accelerate debt repayment, consider refinancing variable-rate accounts into fixed-rate loans. For example, you could pay off credit card balances with a fixed-rate personal loan and stop worrying about interest rate increases.

Another option is a fixed-rate home equity loan. And if you have excellent credit and income, you may still qualify for an interest-free balance transfer credit card. Now is the time to apply because they may not be available if inflation continues to rise.

Keep in mind that refinancing high-interest debt is only smart if you control your spending and refrain from carrying credit card balances.

What happens if you have serious debt problems and your credit card rates increase?

Try to contact a credit counselor who can put you on a debt management plan (DMP). Credit card companies are often willing to work with credit counselors and reduce your interest rates to keep you from defaulting on your accounts.

Another option when rising interest rates make payments unaffordable is debt settlement. Debt settlement means negotiating a lower payment for your unsecured accounts (such as credit cards). Creditors are not obligated to allow this, but many will do so if you demonstrate that you cannot afford the payments.

How to Beat Inflation With Savings

Every month that the inflation rate exceeds the rate on your savings, you lose money. And savings account interest rates have been near zero for years. It's time to reevaluate your investments if you don't want to continue losing purchasing power.

Currently, even so-called "high-yield" savings accounts are paying less than 1%, while the inflation rate at the time of this writing is 8.3%. So, you can see that money in a conservative account is not safe; right now, those accounts are guaranteed losers.

Here are some top tips for bolstering your savings during inflation:

Don't keep too much of your money in cash (or in a low-interest checking or savings account). Your emergency savings should be accessible, but the rest of your savings can be invested more aggressively.

Consider Treasury Inflation-Protected Securities (TIPS), which are government bonds that help protect you from inflation. They are currently paying 9.62%.

Don't lose focus. Inflation can encourage spending and discourage saving. But it's a bad idea to spend unnecessarily and a very bad idea if you finance your purchases. Even at a low interest rate, saving will be better for your future than spending.

Continue to contribute (or even increase contributions) to your company's 401(k) plan. Be sure to take full advantage of matching funds.

Inflation can be stressful, especially if you are approaching retirement or are on a fixed income. You can combat inflation during retirement by being a little less conservative in your investments, but don't risk it all if you don't have time to get it back.

How to Beat Inflation With Budgets

Americans are affected every day by food inflation, rising gasoline prices and supply chain problems. One simple way to combat inflation in 2022 is to cut back on what you spend, at least temporarily. Here are some ideas that anyone can try.

Create or update your budget. If overall prices increase by 8 %, look for ways to reduce overall spending by at least 8 %.

See what carpooling or public transportation can do for your gas costs. If you have more than one car, consider selling one vehicle for extra money, to eliminate a car loan payment and reduce insurance costs.

Examine what you spend on food

Look for cheaper alternatives: try discount stores or less processed food options (which are healthier anyway).

Try to pack your lunch two or three days a week instead of going out to lunch.

Get together with friends to get lucky instead of routinely going out to eat.

Consider canceling your gym membership and getting a running or yoga group together.

Let your hair grow out a bit between cuts. The same goes for regular maintenance, such as facials or massages. If you normally go every four weeks, go every five weeks. That's a 20% reduction in costs.

Reconnect with friends and trade child or pet care for less expensive nights out or weekends away.

Shop for your important expenses such as insurance. See if you can reduce costs by increasing your deductible or finding a lower cost provider.

Make friends with your city: local parks, the library, walking trails, museums and other low-cost places.

You may pick up some good habits over the next few months. That will position you to save more and make up additional ground once inflation is under control and prices come down.

How to Invest to Beat Inflation

It is unfortunate that when the rate of inflation is high, so-called "safe" investments become sure losers. Here are some alternatives.

Historically, investments such as bonds, stocks and mutual funds perform much better than savings accounts. However, with higher returns comes higher risk. One way to minimize risk is to diversify your portfolio. For example, bonds tend to perform better when stocks are losing. Therefore, you can protect yourself from stock losses to some extent by investing in both bonds and stocks.