Still Coping with Inflation

When the government released the Consumer Price Index, there was a sigh of relief among economists. The overall CPI rate actually slid by 0.1 percent in June from May, primarily due to a 3.8 percent drop in gas prices. For the 12 months through June, CPI increased by 3 percent and the core rate, which strips out food and energy, was up 3.3 percent, the smallest 12-month increase since April 2021.

Let’s pause for a moment to underscore something important: Inflation refers to the rate of change in prices. When the economy grows, we always expect some inflation. In fact, in the decade before the pandemic, prices rose by about 2 percent every year, which coincidentally, is the Federal Reserve’s target for inflation. The Fed’s target is not magical, it is the guesstimate of where the central bank thinks the economy can operate at a pace that is strong enough to create jobs, not too hot to foster inflation, and high enough that if conditions change, the Fed has a little room to cut.

For decades, the central bank did not “aim for a target inflation number; even when it appeared to settle behind the scenes on a 2 percent target in 1996”, says Matthew Wells of the Richmond Fed. It was not until 2012 that the two percent target was made public and explicit. It seems hard to believe now, but in the decade after the Great Recession of 2008-2009, economists were most concerned with the fact that prices were growing too slowly! That was one of the rationales for keeping short term rates so low for that period.

Given the past few years, 2 percent inflation seems quaint. When lockdowns were lifted, supply chains were constrained, just as people were ready to go out and spend their COVID relief dollars. As a result, prices soared, and the rate peaked at 9.1 percent in 2022. Now the rate has dropped to 3 percent, which is great, but it does not mean that prices have dropped by 6.1 percent. It means that the overall rate of price increases is slowing down, a condition that economists call “disinflation”. Unfortunately, prices are almost 23 percent higher than they were 5 years ago. According to the Public Policy Institute of California, had the economy been operating at the pre-Covid 2 percent rate, prices would be just 11 percent higher than they were 5 years ago.

I know you want prices to fall (that’s called deflation), but that usually does not happen to the overall inflation rate unless there is a major economic slowdown or a recession, something we should be rooting against. Still, there are a few parts of the CPI, where there was a drop in prices. Airline fares fell by 5 percent in June from May and lodging away from home prices were down by 2 percent, so maybe the post-Covid travel boom could be wrapping up. Buying a used car is a lot easier now, prices were down 1.5 percent month over month and are more than 10 percent lower than they were last year at this time. You’ll need that extra money, because auto insurance costs 19.5 percent more than it was a year ago!

With all of this in-dis-de-flation knowledge, here’s the takeaway: the inflation rate is moving in the right direction but has not receded to the point where the Fed is going to cut rates at its next policy meeting later this month. If the data continue to show improvement this summer, the central bank could be eyeballing the September meeting for the first cut.

Until then, refresh some tried and true inflation-coping basics. Start by tracking your spending. Although the little things can add up, pay close attention to the biggest categories, which are housing, transportation (including gas) and food. It doesn’t matter how you keep track, old school pen and paper, spreadsheets, or free apps (PocketGuard, Goodbudget and Honeydue, and also through most major banks), but just do it for 90 days and you may find places to trim.

You may also want to think about firing up a side hustle. A recent Bankrate survey found that 36 percent of side hustlers use their extra income to pay for regular living expenses, like rent and groceries. “The average side hustlers say they make $891 on average per month in extra income aside from their main source of income, up from $810 in 2023.” Not surprisingly, more than half of respondents have been making money on the side for two years or less, just as the inflation rate was peaking.

Bringing in extra income will hopefully prevent you from going into debt. After plowing through pandemic savings, many have turned to credit cards to meet their needs. Households increased their revolving credit (a category composed mostly of credit cards) by a 6.3 percent annual rate in May, bringing the total to over $1.3 trillion. With interest rates high, that means anyone carrying a balance is paying an average of over 22 percent on that debt. Ouch.