Inflation jumped 8.5% through March.
This is the highest reported level since 1981. 😬
It was also the biggest monthly jump in prices since 2005.
However…there are some tentative signs that inflation may be slowing.
I’m sharing more in this episode + providing thoughts on how retirement savers might respond.
How to Listen to Today’s Episode
Episode Links & Resources:
- Need a One-Time Retirement + Tax Analysis?
- Stay Wealthy Inflation Episodes in 2022:
- CPI Report-March 2022 [U.S. Bureau of Labor Statistics]
- Gasoline Prices Popping Likely Represent Something of a Peak [NY Times]
Has Inflation Peaked?
Taylor Schulte: Welcome to the Stay Wealthy podcast! I’m your host Taylor Schulte and today I’m jumping in to quickly address the recent inflation report.
To grab the links and resources for this episode, head over to youstaywealthy.com/149.
So, as you might have already seen, the March CPI report was released this week and the year-over-year annual inflation rate jumped to a four-decade high of 8.5%.
As a reminder, these CPI reports come out monthly, and they report the prior month's number, which is then consolidated with the previous 12 months of reports to arrive at the headline inflation rate you see in the media. That’s the 8.5% number I just referenced. That number is referencing the inflation rate for the time period March 2021 to March 2022. The actual CPI for March, which is often buried in the news articles and hard to find, was 1.2%.
For some perspective, the CPI for February was 0.8% and January was 0.6%. So inflation has certainly jumped recently, as anticipated.
One report estimated that U.S. households are spending an extra $327/month due to the recent spike in inflation.
While this was the biggest monthly jump in prices since September of 2005 and the biggest year-over-year jump since 1981, there are some positives we can pull out of this report.
For example, if you strip out food and energy from the March report, inflation is actually slowing. And yes, food and energy are things we all need to pay for in our daily life but they are also more volatile. In other words, their prices tend to fluctuate, and big monthly swings don’t typically stick around for the long-term. On this note, chief economist at Ernst & Young, said this week that “given the pop in gasoline prices in March, these numbers are likely to represent something of a peak.
While US consumers are likely more impacted by food and energy costs, The Fed is more focused on prices that are sticky. The measurement of price stickiness is often referred to as “core inflation” and core inflation excludes food and energy prices. In March, core inflation rose 0.3%, which was lower than in February which rose by 0.5%. So, because core inflation seems to be slowing, at least for now, the Fed may be motivated to back off a bit and cool its aggressive plan to combat inflation.
In fact, U.S. government yields fell on Thursday due to these tentative signs of easing inflation pressures.
In case you’re wondering, the sectors that helped slow down core inflation last month include used cars and commodities, with prices down 3.8% and 0.4%, respectively. New vehicle prices were basically flat, as were prescription drugs, medical equipment, and supplies.
While there does seem to be some optimism in the air, we need to pay close attention to service sector prices and wages which continue to gather momentum. For example, rent and other housing expenses are increasing more rapidly. And wages are up sharply as well, pushing costs up for employers, which might force them to continue to raise prices and pass those higher costs onto us, the consumer. We will likely need to see this momentum cool for everyone to really feel like they can take a deep breath and feel like inflation is under control.
Of course, all of this leads to the big question, which is what should we, as retirement savers and investors, do in response. And this is why I try to stay away from current events and things we don’t have control over because taking action and doing something based on them isn't. But these are historic events we’re living with and it feels odd to not bring them to the surface and discuss. As for what to do in response, I think all of this is a good reminder as to why we take our money out from underneath our mattresses and invest it in the first place.
Next week, I have a friend and popular finance author, Nick Maggiulli on the show. Like all of us here, Nick loves using data and evidence to make investing decisions. In fact, Nick is a data scientist who works in wealth management which is quite rare. Anyhow, Nick has a new book out and in it he shares that if inflation is 4%, it only takes 17 years for your money (or purchasing power) to be cut in half. If inflation is 5%, it only takes 14 years to cut your purchasing power in half.
For those in the working world, your wages are hopefully growing and increasing at a similar rate as inflation. For those in retirement, that’s not the case. You don’t have the benefit of earning higher wages. Instead, you have to invest wisely and for the long term in order for your hard-earned money to keep pace with inflation. Or, maybe you don’t need your money to keep pace with inflation. Maybe you have been such a good saver and/or your expenses are so low that you can afford to be more conservative and keep a good chunk of your money under the mattress.
There is no one size fits all answer here, and how you behave, how you respond to the current environment depends on you, your needs, your goals, and your financial plan. Remember, the recent inflation report should not influence changes to your investments. Your investments should only change if your investment policy statement changes. And your investment policy statement should only change if your financial plan changes.
Next week, we’ll chat more with Nick about investing in high inflationary environments, not to encourage you to go and make investment changes but to give you knowledge so you can continue to make an educated decision and avoid making costly mistakes. We also talk about why you shouldn’t wait to “buy the dip” as well as Nick’s actionable formula you can use to invest during market meltdowns. We had a good chat and I look forward to sharing it with you.
Once again, to grab the links and resources mentioned in today's episode, just head over to youstaywealthy.com/149.
Thank you, as always, for listening and I’ll see you back here next week.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.