As 2011 draws to a close, it is clear that the U.S. economy is at least beginning to stabilize. Unemployment reached its lowest level since February during the final quarter of 2011, while the average U.S. household has also enjoyed having additional disposable income since the close of 2010. With the Social Security Administration (SSA) also announcing a 3.6% cost of living increase for benefits recipients in 2012, you could be forgiven for thinking that the next 12 months will provide considerable economic respite for households across the land. (For related reading, see Increase Your Disposable Income.)

TUTORIAL: Personal Income Tax Guide

Reasons for Caution
Despite the broadening beam of light at the end of the tunnel, the cost of living benefits increase is tempered by other government proposals for 2012. To begin with, the Medicare Part B premium is set to rise for the first time in three years, and there are fears that this may at least partially offset the increases in benefit. Not only this, but the maximum salary subject to social security tax is also set to rise from $106,800 to $110,100 in 2012, which will leave approximately 10 million U.S. citizens facing inflated tax liabilities.

Whether you work or are currently claiming social security benefits, it is becoming increasingly clear that 2012 may at best be a year of consolidation rather than considerable growth. This position is not helped by the financial crisis that is developing in Europe, which is providing a clear threat to the banking sector and economic growth as a whole. With this in mind, U.S. households need to remain prepared as they enter 2012, and take steps of their own to guard against a potential increase in the cost of living. (Read how to Maximize Your Social Security Benefits.)

Inflation and the Rising Cost of Food
With issues of tax and medical insurance placed to one side, there are other more fundamental concerns that influence the day-to-day cost of living. Inflation and the cost of food are two relevant examples, and both have soared throughout 2011 while the economy has stalled and unemployment has remained uncomfortably high. While the cost of both items are unlikely to remain as high throughout 2012, many U.S. consumers will still need to adjust their budgets to account for expenditures that is out of proportion from their incomings.

In terms of food, becoming a smart shopper applies both to the outlets that you frequent and the way in which you select and purchase goods. Many retail outlets and supermarkets now have an online store and delivery function, and this allows you to shop in a considered manner and without the lure of impulse buys and a handily placed electronics isle. It is also important to look beyond the basic retail price of food items, as this alone does not indicate whether it provides value for money. Break its cost down into the price per unit or individual measurement, so that you can make a considered purchasing decision on the deals that you find. (To learn more, read 22 Ways To Fight Rising Food Prices.)

Energy Costs
There is mixed news for motorists and homeowners when it comes to fuel and heating costs. The national average price of gasoline is expected to drop to $3.10 per gallon by January 2012, and this trend should continue throughout the remainder of the year. However, truck drivers and commercial diesel users can expect the price of fuel to remain high due to an increase in the exports of diesel. The cost of household heating oil is also set to rise significantly throughout the first quarter of 2012, with a harsh winter set to take its toll on consumers' wallets and force prices skyward.

As a motorist or homeowner, now is the time to prepare for these cost hikes and make the necessary adjustments. With diesel prices unlikely to fall significantly throughout 2012 and beyond, it may be worth considering either converting your vehicles engine to run on gas or investing in a more fuel efficient model to get you from point A to B. In terms of energy usage within the home, consider implementing LED lighting throughout your property as opposed to standard fluorescent fittings, and be sure to seek out and engage new energy providers once your current deal has expired. These steps will help to reduce your annual lighting and heating bills significantly, and offset any increase in base prices.

The Bottom Line
With all this information in mind, it should be clear that while the cost of living in the U.S. for 2012 may well fall from this year's highs, it will still remain out of proportion from the average household income. This means that families and consumers must tighten their belts and consolidate for the next 12 months, and offset their own cost of living increases by adopting sound financial practices. (For related reading, see Ways To Slash Your Home Energy Bill.)

Related Articles
  1. Professionals

    3 Benefits of Working Longer (and Retiring Later)

    There are many reasons why folks in their 60s may want to keep working until at least age 70. Here are three.
  2. Professionals

    How to Get Free Social Security Spousal Benefits

    Married couples should thoroughly examine whether they are eligible to collect free spousal benefits on their Social Security income.
  3. Professionals

    Social Security COLA in 2016? Not Likely

    A cost of living increase for Social Security doesn't look likely in 2016. Here's what retirees should know and what they can do about it.
  4. Professionals

    Is Delaying Social Security Until 70 a Good Idea?

    Soon to be retirees are often told it's best to wait until age 70 to collect Social Security. Here's why this is not always the best advice.
  5. Professionals

    Top Tips for Maximizing Social Security

    Between delaying filing, claiming strategies and taking advantage of special marital benefits, there are several ways to maximize Social Security.
  6. Professionals

    When Taking Social Security Early Can Make Sense

    Sometimes it makes financial sense to take Social Security early. Here's a look at when this might be a good idea.
  7. Professionals

    Social Security and Divorce: A Guide

    Retirement for divorced individuals can be more complex. Here's how to navigate Social Security benefits.
  8. Insurance

    How Do Workers' Compensation Benefits Work?

    What you need to know about Workers Compensation benefits.
  9. Professionals

    How to Boost Social Security Spousal Benefits

    There are a wide variety of complex spousal Social Strategy strategies. Here are the best ways to get the most out of them.
  10. Professionals

    10 Things You Need to Know About Social Security

    Every saver should know these ten things about Social Security retirement benefits.
  1. Are Cafeteria plans taxable?

    Whether the benefits you receive through your employer-sponsored cafeteria plan are taxable depends entirely on which benefits ... Read Full Answer >>
  2. Are Cafeteria plans exempt from Social Security?

    Typically, qualified benefits offered through cafeteria plans are exempt from Social Security taxes. However, certain types ... Read Full Answer >>
  3. Why would someone change their Social Security number?

    In general, the Social Security Administration, or SSA, does not encourage citizens to change their Social Security numbers, ... Read Full Answer >>
  4. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  5. Are spousal Social Security benefits retroactive?

    Spousal Social Security benefits are retroactive. These benefits are quite complicated, and anyone in this type of situation ... Read Full Answer >>
  6. Are Social Security payments included in the US GDP calculation?

    Social Security payments are not included in the U.S. definition of the gross domestic product (GDP). Transfer Payments For ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!