Inflation is not what it was a year ago. But it’s still an issue.
Last June, the year-over-year headline consumer price index (CPI) reached its highest point so far during this inflation cycle, which began in April 2021: 9.1%. Since that time, however, the rate of increase has slowed during each subsequent month. As of last month, CPI was down to 4.9%.
That’s great news. However, the trend of steadily decreasing CPI doesn’t mean inflation is behind us – as some of the most recent data indicates.
For example, while the pace of headline CPI in April did slow to 4.9% on an annual basis, the monthly figure accelerated 0.4% after coming in at 0.1% in March.
A closer look at core inflation – which purposely excludes volatile food and energy prices – reveals particular stubbornness in the trend since the beginning of the year. In January, year-over-year core inflation was 5.6%. By last month, it had improved just one-tenth of a point: 5.5%. As for the monthly figure, April was the fifth consecutive month CPI rose at least 0.4%.
More recently, April data for the Federal Reserve’s “favorite” inflation index – the personal consumption expenditures (PCE) index – further underscored the idea that inflation may be getting just a bit “sticky.”
Fed officials prefer the PCE index because the representative “basket” of goods and services is updated more frequently than the CPI basket, resulting in a potentially more accurate look at inflation. PCE also reflected price-pressure stubbornness in April.
For starters, headline PCE was up 0.4% for the month of April, the fastest pace in the last three months and well above March’s 0.1% increase.
On an annual basis, headline PCE in April also accelerated over the prior month: 4.4% vs. 4.2% posted in March.
Both the monthly and annual core measures also demonstrated some acceleration: 0.4% for the month of April against 0.3% in March, while year-over-year core PCE was up 4.7% in April vs. 4.6% in March.
Notable, as well, is that annual core PCE has remained at either 4.6% or 4.7% every month since December 2022, suggesting inflation stickiness through that particular metric, as well.
Some might speculate that two-plus years of inflation well above the Federal Reserve’s 2% target would take their toll on American consumers and savers. If you go by the results of a recently published Fed survey designed to gauge household well-being, their hunch could be correct.
As it happens, we’re going to take a closer look at the survey. We’re going to do so not only to better understand how challenging inflation has been, but how challenging it could continue to be going forward – particularly in light of evidence that price pressures may be with us for a long time to come.
According to the results of the Federal Reserve’s 2022 “Survey of Household Economics and Decisionmaking (SHED),” inflation is the chief culprit in what has been a decline in the self-reported well-being of American citizens over the past year. By a significant margin, survey respondents identified inflation as their “main financial challenge” over other options such as “retirement and savings,” “housing,” and “employment.”
Inflation was identified as the “main financial challenge” by one-third of households. That’s more than four times the number who said the same thing in 2016.
The 2022 survey found 73% of households said they were doing “at least okay financially,” down from the 78% who said so in 2021. That five-percentage-point drop is the biggest on record since the survey began in 2013.
As for those who explicitly said they were worse off, that number surged 15 percentage points last year to 35%. It turns out that’s the highest level since the Federal Reserve began asking that question in 2014.
According to the survey, 85% of adults indicated their family budgets had been affected at least “somewhat” by price increases, with 54% saying their budgets had been impacted “a lot” by price increases.
Comments made by survey respondents further clarified just how inflation is impacting their financial profiles.
One respondent said, “Energy costs, grocery costs, gasoline: everything we buy now has increased drastically.” According to the Fed summary of the survey results, a number of other respondents made a point of mentioning how wages have not kept up with rising prices. “Prices [are] going up but our paychecks don’t,” said another.
In fact, real wages (which account for inflation) on a year-over-year basis have declined every month for the last two years.
It also appears inflation has affected Americans’ assessments of the conditions of their local economies and the national economy.
According to the poll, 38% of American adults characterize the condition of their local economies as either “good” or “excellent.” That’s down from 48% who said so last year and substantially below the 63% who saw their local economy as either “good” or “excellent” in 2019, which is the last year before the onset of the pandemic.
Referring to the survey summary as “sobering,” renowned economist Mohamed El-Erian recently said, “It is yet another indication of how much inflation has undermined the financial security of Americans.”
El-Erian added that “the declines in financial well-being across these measures provide an indication of how families were affected by broader economic conditions in 2022, such as inflation and stock market declines.”
And if inflation IS getting a little sticky, those families may continue to be affected for a while. Included among the “sticky-inflation” indicators are expectations of both analysts and consumers that prices are likely to stay elevated.
Let’s talk about that next.
A number of credible experts from a variety of agencies and organizations seem convinced that the inflation which has proved to be such a thorn in the side of Americans’ well-being thus far will continue to be our “companion” – some think for years.
For example, in its Budget and Economic Outlook: 2023 to 2033, the Congressional Budget Office (CBO) doesn’t project the consumer price index (CPI) returning all the way to the Fed’s 2% target any time before 2034.
The Conference Board’s outlook is more optimistic – which isn’t the same thing as saying it’s exactly rosy. The Board says it doesn’t believe we should look for inflation to return to the Fed target until the end of 2024.
The projections of Fannie Mae economists extend through the end of 2024, and even by that time they don’t see inflation having made a return to 2%. According to their most recent forecast, they expect year-over-year CPI to be down to 3% by the fourth quarter of this year…but they suspect it will still be at 3% by the fourth quarter of 2024, as well.
It’s not just economists and professional analysts who anticipate “sticky” inflation for years. Consumers appear to see the same thing. Those who participated in the most recent survey designed to calculate the University of Michigan’s Consumer Sentiment Index – which, by the way, remains among its lowest-ever levels – said they expect inflation at 4.2% a year from now. And five years from now? They think inflation could still be slightly above 3%.
Survey respondents polled by The Conference Board for its latest Consumer Confidence Index anticipate inflation to average slightly more than 6% over the next 12 months.
Consumer inflation expectations, in particular, are enlightening in any analysis of potential economic moves. When consumers expect inflation to be an issue in the future, that belief in the past has prompted them to ask for wage increases as well as make purchases today that they might have delayed in different circumstances. Based on economic principles, those behaviors can, in turn, prompt businesses to hike prices in the present day in a response to higher wages and increased demand, which, in another turn, can make inflation even worse.
“When inflation expectations get too high, they impact the actual rate of inflation,” explains Scott Ruesterholz, a portfolio manager at Insight Investment.
So, not only is inflation still an issue right now, it could continue to pose a challenge for a while. And even though it’s not likely to return to the loftier heights of last year, it turns out that even more modest levels of inflation can make a big impact on savings if they hang around long enough.
Let’s talk a little more about that before we close out this week’s article.
Let me be clear: Inflation right now is not the acute problem it was a year ago.
When headline CPI for last month came in at 4.9%, it represented the tenth month in a row the metric had slowed from the 9.1% rate that was reached in June 2022. Given this trend, it may not be appropriate to suggest that inflation is poised to reaccelerate significantly in this cycle.
But in light of the evidence, neither is it inappropriate to suggest inflation that sits at least a few percentage points above the Fed’s 2% target could be here for a while.
And that brings me here: Inflation doesn’t need to push 10% to be an issue for retirement savers. Ongoing higher inflation – though not necessarily high inflation – has the potential to affect the purchasing power of accumulated savings over an extended period.
For example, given all the months over the past two years during which headline CPI has been at 6% or above, an inflation rate of, say, 4% may seem very modest. And in a relative sense, it is, given the levels of inflation we’ve all had to deal with recently.
But in an actual sense, 4% inflation still can be a problem over the long haul. Someone who has a half-million dollars tucked away might be surprised to learn the purchasing power of that sum would be reduced by more than half over a 20-year period if it was burdened with a 4% inflation rate.
Put another way, for $500,000 to buy as much as it does today 20 years from now – assuming 4% inflation – it would have to grow to nearly $1.1 million over that period.
It’s an important point, particularly right now. Yes, inflation appears to be continuing to subside from the near-10% level it approached roughly a year ago. That certainly is a good thing. But it’s not a bad thing to be aware that inflation materially above 2% may “stick” with American consumers and savers for a while.
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