Peak Inflation: A Distinction Without a Difference, Experts Suggest

Good news, says a sizable chorus of observers: Peak inflation finally has arrived.

We can count President Biden among those who are singing that tune. When June’s 9.1% consumer price index (CPI) – highest since November 1981 – was announced, President Biden declared the figure to be “out of date” based on the fact that gas prices have been dropping steadily over the past month.[1]

But does a moderation in fuel prices signal that peak inflation has been realized?

Not necessarily. Even discounting fuel prices entirely, there are numerous areas of the economy still experiencing upward price pressures.

There’s something else: Let’s say, for the sake of discussion, inflation has peaked.

So what?

Peak inflation simply means already-high prices won’t move even higher. It doesn’t mean they’re going to begin decreasing to a meaningful degree anytime soon.

In fact, there are plenty of analysts saying that very thing right now – that even if we see inflation moderate from here, it will do so only slightly. If that’s true, prices could remain at significantly high levels for a long time to come.

As an argument against lasting high inflation, some will point to the now-aggressive rate-hike regime initiated by the Federal Reserve. The Fed does seem serious about reining inflation in. There’s even been talk that the next rate increase could be as much as 100 basis points.[2]

That said, there are two issues worth considering with regard to the rate-tightening cycle underway. For one thing, there’s doubt in some circles the Fed will continue hiking rates if doing so means plunging the nation into a sizable recession. There even are analysts who think we could see the Fed begin lowering rates later this year.[3]

And for another, even if the Fed stays the course and continues tightening, rate increases likely won’t magically and rapidly reduce stubborn inflation to the 0-2% level to which we’d grown accustomed.

In other words, higher inflation could be a fact of life through the foreseeable future.

If it is, the implications for all Americans could be significant. But the implications for retirement savers could be especially profound. Accordingly, savers might do well to consider how they can help mitigate not only the direct effects of those higher prices on their holdings but the economic volatility that often accompanies those elevated prices, as well.

The Case Against Peak Inflation

Economists are quick to strip food and energy prices out of headline inflation measures in order to see how “core” inflation is trending. They do this because as impactful as food and energy inflation obviously is to consumers, their prices frequently are influenced by factors detached from the underlying economy and monetary policy.

For the sake of discussion, let’s play the economists’ game for a minute. Let’s look at what core inflation did last month and see if, in fact, an inflation measure that does not include volatile food and energy prices gives us reason to think inflation has reached a peak.

What we find is that the evidence supporting peak inflation is inconclusive at best. It may even explicitly weaken the peak inflation argument.

Looking at CPI minus food and energy prices, inflation increased by 5.9% last month.[4] Some might say, “A-ha! May’s core CPI was an even 6%. So core inflation is showing signs of retreating.”[5]

That conclusion may be more than a bit premature, however.

For one thing, a year-over-year dip in core CPI by just one-tenth of a percent is not proof of peak inflation. Ben White, chief economic correspondent at POLITICO Pro, seems to agree.

“Wall Street expected a bigger dip to 5.7 percent to confirm the idea that the worst was over,” White said recently. “It does not appear to be.”[6]

As a matter of fact, on a month-to-month basis, core inflation rose by 0.7% in June. That’s slightly more than the increase we saw in May (0.6%).[7] It also is greater than the 0.5% figure estimated by the Bloomberg survey of economists.[8]

Also working against the peak inflation argument is that upward price pressures now are being reflected in a broader array of CPI’s component indexes outside of food and energy.

“As painful as June’s higher number is, equally as bad is the broadening sources of inflation,” said Robert Frick, corporate economist at Navy Federal Credit Union. “Though CPI’s spike is led by energy and food prices, which are largely global problems, prices continue to mount for domestic goods and services, from shelter to autos to apparel.”[9]

Particularly noteworthy is the 0.8% month-to-month increase in the rent index – that measure’s biggest jump since April 1986.[10] The shelter index, which accounts for not only actual rental properties but also what homeowners would be paying if they were renting their properties, rose 5.6% year over year. It’s the biggest increase for that component index since February 1991.[11]

None of this is to say we absolutely aren’t approaching peak inflation – we very well could be. However, the data in support of peak inflation is hardly compelling at this point.

But let’s say that we are on the verge of peak inflation. What then? Will inflation drop back down to the Fed’s preferred 2% target rate in short order?

Not likely. In fact, the inflation outlook is hardly comforting.

Let’s talk about that now. 

Experts: Even If Peak Inflation Is Here, Expect Higher Prices to Persist

Peak inflation simply means prices have topped out. It doesn’t mean they’re going to plummet back to earth and get back in line with the Federal Reserve’s 2% annual target rate.

As a matter of fact, there’s no shortage of financial professionals who say we should look for inflation to remain well above that 2% figure for some time to come.

For starters, inflation-derivatives traders don’t see inflation peaking until as late as October.[12] If they’re right, it means several more months of inflation at what basically is the same level at which it sits right now.

As to the matter of how fast inflation recedes, a recent survey of fixed-income managers found that two-thirds expect core inflation to stay between 3% and 4.5% through the next 12 months.[13]

Notably, not one of the managers surveyed sees core inflation dropping below 2% any time in the next 12 months. And fewer than 5% expect that headline CPI will drop below 2% in the next five years.

Kiplinger’s latest inflation projection says the headline rate will remain around 9% for the remainder of 2022, at which point it will begin a gradual decline. Kiplinger’s forecast also says inflation will decrease to about 3% by the end of next year. They make no assessment when – or if – inflation will go any lower.[14]

And for his part, Steve Hanke, professor of applied economics at Johns Hopkins, said recently during an appearance on CNBC’s “Squawk Box Asia” that he foresees headline U.S. inflation sitting between 6% and 7% through the end of 2023. The chief culprit of soaring prices is largely unbridled growth of the money supply, according to Hanke. The economist noted during his CNBC interview that the nation’s M2 money supply has grown by more than 40% over the past two years, well beyond the level of national economic output. Hanke says that excess money is continuing to “bleed” into the economy as inflation, which is why we’ll see prices remain substantially elevated for a long time to come.[15]

There may be disagreement among economists and other professional observers about precisely where inflation will be by the end of 2023. But it’s clear that few see it retreating all the way back down to 2% or less by then. If the prevailing view on longer-term inflation expectations is correct, it implies that inflation above 2% could last into 2024 – perhaps longer.

What might higher inflation for an extended period mean for retirement savers? And what in the world can they do about it?

Chronic High Inflation Can Greatly Impact Retirement Savers’ Purchasing Power

That possibility of higher inflation for longer is something to which retirement savers should pay close attention, in my opinion. Since April 2021, which marked the first month of the current inflation cycle, headline CPI has averaged roughly 6.3%.[16] That means in the span of just 16 months, a $500,000 retirement account has lost nearly $40,000 in purchasing power.[17]

Even if inflation moderates to the point where it averages, say, 4.5% over the next two years, the same account would lose another near-$40,000 in purchasing power.[18] That would translate to a total purchasing-power loss of close to $80,000 in a relatively brief period.

It cannot be disputed that the stakes are high for retirement savers – and particularly those folks already retired – who face the prospect of elevated inflation for the long term. As for how to mitigate the impact of chronically higher prices, individuals at greatest risk of suffering their effects may need to develop a strategy comprised of multiple components.

Some retirees might go as far as returning to work. We know that trend is already underway. A recent AARP study revealed that 1.7 million seniors have “unretired” in the past year.[19] If higher inflation persists, it’s not unreasonable to imagine that number will grow considerably – particularly if inflation is joined by a recession triggered through higher interest rates.

Ultimately, the measures you implement on behalf of your own inflation-fighting efforts will be your decision. What isn’t your decision is whether higher inflation lasts through the foreseeable future. And if it does – as experts now are projecting – your personal financial outlook likely will be better served the sooner you embrace that reality and take meaningful steps to minimize its impact.

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[1] Jeffry Bartash, MarketWatch.com, “Biden touts falling gas prices, but it’s no cure for high inflation” (July 13, 2022, accessed 7/21/22).

[2] Megan Henney, FoxBusiness.com, “Citi forecasts historic 100-basis point Fed rate hike after inflation shocker” (July 15, 2022, accessed 7/21/22).

[3] Silvia Amaro, CNBC.com, “Forget rate hikes, these analysts are predicting interest rate cuts next year” (July 1, 2022, accessed 7/21/22).

[4] Bureau of Labor Statistics, “Consumer Price Index – June 2022” (July 13, 2022, accessed 7/21/22).

[5] Bureau of Labor Statistics, “Consumer Price Index – May 2022” (June 10, 2022, accessed 7/21/22).

[6] Ben White, Politico.com, “Biden’s inflation nightmare gets scarier” (7/13/2022, accessed 7/21/22).

[7] Bureau of Labor Statistics, “Consumer Price Index – June 2022.”

[8] Pablo Piovano, FXStreet.com, “US: Higher inflation might prompt a larger rate hike – UOB” (July 18, 2022, accessed 7/21/22).

[9] Jeff Cox, CNBC.com, “Inflation rose 9.1% in June, even more than expected, as consumer pressures intensify” (July 13, 2022, accessed 7/21/22).

[10] Bureau of Labor Statistics, “Consumer Price Index – June 2022.”

[11] Ibid.

[12] Vivien Lou Chen, MarketWatch.com, “‘Inflation is going to be stickier than most people imagine’: Inside the obscure market where traders have been mostly right about price gains.” (July 13, 2022, accessed 7/21/22).

[13] Reuters.com, “Bond investors see U.S. inflation higher for longer- Russell survey” (July 7, 2022, accessed 7/21/22).

[14] David Payne, Kiplinger’s, “Inflation Will Stay Near 9% the Rest of This Year” (July 13, 2022, accessed 7/21/22).

[15] CNBC.com, “Steve Hanke says he sees persistent inflation of between 6% to 7% through 2023” (July 11, 2022, accessed 7/21/22).

[16] U.S. Inflation Calculator, “Historical Inflation Rates: 1914-2022” (accessed 7/21/22).

[17] BuyUpside.com, “Inflation Calculator” (accessed 7/21/22).

[18] Ibid.

[19] Vance Cariaga, Yahoo.com, “Why Retirees are Returning to Work — It’s Not for the Paycheck” (June 20, 2022, accessed 7/21/22).

[20] Alicia H. Munnell, MarketWatch.com, “The stock market decline is undercutting retirement saving” (June 21, 2022, accessed 7/21/22); Paul Wong, Sprott.com, “Gold Holds in Worst First Half in Decades” (July 7, 2022, accessed 7/21/22).