Inflation vs Our Experience
Inflation is mostly back under control, with the recent headline inflation reading coming in at 3.1%.
It may surprise you that the current reading is actually below the long-term average of 3.8% from 1960-2022.
If inflation is, in fact, back under control...
...why does everything still feel so expensive?
In June 2022 inflation peaked at 9.2%; which means that the costs of goods and services rose, on average, almost 10% in just one year! We feel that sudden spike in price because our frame of reference is recent. When prices rise slowly over time we don’t feel it as much.
So even though inflation is back under control, stuff IS still expensive! As an example a box of cereal that may have cost $4 before now costs $6. We shouldn’t expect the prices of everything to suddenly start declining either. That would be disinflation and that has it’s own set of problems.
What makes these new prices more difficult to digest is that over the last couple of decades we have been used to prices rising in cents, not dollars. That’s very noticeable and we feel it in our wallets.
There are other factors at play too. Just becuase input costs may have declined, it’s unlikely that companies will pass those saving on to consumers, at least immediately, This may not be good for consumers, but it is probably good for workers and investors of these companies.
Is that good or bad? It depends on what side of the ledger you sit on.
We endured the first pandemic in a century and the government, on both sides of the aisle, pulled out all the stops to save the economy. Unfortunately the cost of preventing a financial meltdown came with a bout of inflation.
If the 70’s and 80’s are roadmap of what to expect than we shouldn’t expect prices to revert to pre-COVID levels. So the best case scenario is that prices remain stable from here on out.
Inflation is particularly harmful to those on fixed income with variable costs like food, gas and rent. Having a financial plan that adjusts for inflation can help you better navigate retirement.