We love hearing from our readers on suggestions for blog topics and most recently received a request to touch on a topic that we as consumers are all feeling – how can consumers weather an environment where higher prices persist and what is the effect of CPI on the economy and interest rates?
This is a timely topic, particularly with the slew of economic data released yesterday and today which included CPI (Consumer Price Index), PPI (Purchasing Price Index), and retail sales. CPI tends to be the more widely watched gauge of inflation, the biggest weigh on consumers. To calculate CPI, the Bureau of Labor Statistics samples 80,000 prices monthly, weighing the index for each product or service in proportion to its share of recent consumer spending to compute the overall change in prices.
The good news is that for October, the Consumer Price Index slowed to a 3.2% increase year-over-year, lower than the 3.7% reading in September, showing a deceleration in inflation, partly due to moderation of energy prices.
This is encouraging data, but while average CPI is trending downwards from year-over-year, the reality is most consumers are still feeling the pinch. Understandable since the three heaviest weighted components of CPI are Housing, Transportation, and Food & Beverages, i.e the three areas where the average US consumers are spending most of their money. ** Side note — Energy is not lumped into its own category, but rather is part of a subcategory in Housing and Transportation.
A decrease in year-over-year inflation is positive, but the below show the true picture of cumulative inflation over time. The solid lines are the CPI numbers we are seeing in the news (reverting back down the mean), the dotted lines are what consumers are feeling and seeing on price tags. So not surprising that things still feel expensive!
Interestingly higher prices have not resulted in much of a slowdown of consumer spending as we saw in the retail sales numbers this morning, but rather the opposite has occurred, due to low unemployment and wages rising faster than inflation.
The rate of consumption spending is critical as it makes up two-thirds of the U.S. economy on average, so the questions remain if or when spending will slowdown and the breadth of its affect on the economy. In all honesty, I wish I knew the answers specifically! Current economic data continues to show a resilient consumer and economy despite consumers feeling pretty negative.
If the economic data continues on its current trajectory with inflation coming down, retail sales moderating, and employment levels remaining stable then theoretically interest rates should pause and eventually begin coming down – a reward for patient bond investors.
The reality is no one is able to precisely predict what will happen in the economy or when, which is why sticking with a plan for the short, intermediate, and long-term is the best strategy with weather current inflation and interest rates.
During this holiday season where most families tend to spend more and in the current environment, it is recommended to take these few steps to stay on track:
- Seek out substitutions and explore your options if necessary. Particularly with grocery shopping. Based off a report from the American Farm Bureau Federation, “With most food manufacturers operating at full speed based on employment growth and automation, there will be intense pressure on retailers to pass along savings to consumers in the bid for consumer shopping dollars.”
- Utilize accounts with cash back features. Many cards and local banking accounts are now providing decent cash back features when used for purchases on food, travel, and gasoline. This cash back can add up if done responsibly!
- Don’t neglect your emergency savings. Higher prices have reflected a decline in individual savings; however, it is still crucial to have the 3-6 months of expenses set aside. This will avoid having to put purchases on credit cards which are carrying historically high rates.
- Don’t forget the long-term. Almost all investors have felt beaten down due to recent market volatility with bonds and stocks, but patient and prudent investors have been rewarded. As of right now, the S&P 500 is up over 9% over the last three weeks.
- Revisit allocation to ensure shorter term needs are benefiting from the current higher rates, but mid to long term funds are not missing out on the long-term historic returns of quality stocks and a diversified portfolio.
Lingering higher prices and a holiday season focused on consuming can feel overwhelming, but staying locked in and dedicated to your plan will pay off.
Speaking of staying locked in, we visited the Explore More Discovery Museum in Harrisonburg with our kids and I was thrilled to see they had an entire section dedicated to teaching children about the basics of investing and finances. Our youngest was really locked in and dedicated to the exhibit titled “Invest like a Squirrel” which was trying to teach the concept of diversifying your money (or nuts for squirrels) into different parts of the tree. He really gave it his all!
