Persistent Inflation Continues to Cause Pain for Americans

President Reagan once said, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”

Hmmm . . . Inflation. Dormant for decades, now an integral part of our vocabulary today. 

Folks, No matter who you are or where you are in your professional or retirement life, continued high inflation is causing pain for many Americans these days. It’s easy to worry about your assets during signs of inflation, and some certain economic trends might cause the average person to watch their spending. Even the price of a Big Mac is influencing some folks to eat at home these days. But it’s an entirely different story when you’re in your 50’s and 60’s and trying to figure out how to plan for retirement.

So, it’s not surprising that, according to a recent survey from the Federal Reserve on household economics and decision-making₁, 35% of respondents said that price hikes were their main source of financial worry, up from 33% the previous year. The share of US households that said their financial health was OK fell to 72% last year, the lowest since 2016, according to the study. That’s slightly less than 73% from 2022. 

The survey also found that 65% of respondents said that high prices have made their financial situations worse, while just 34% said their family’s monthly income has risen in the past year. Rental costs in particular are proving to be particularly challenging for households, with almost one in five saying that they fell behind on rent at some point in 2023 – up from 17% the previous year.

So, just when will this period of high inflation end, we all want to know? Well, this week let’s dig into what’s going on with inflation and when we might expect some relief. 

For starters, we can probably rest easy that the extreme inflation of 2022 has passed. CPI inflation peaked at 9.1% in June 2022, and it has declined fairly steadily through the end of 2023. The issue now is that there has been an upward movement during the first three months of 2024, which is disheartening to those hoping for a reprieve from high prices. In April, the U.S. Bureau of Labor Statistics released the Consumer Price Index (CPI) for March, and the increase in CPI — the most commonly cited measure of inflation — was higher than expected. The rate for all items was 3.5% over the previous year, while the “core CPI” rate, which strips out volatile food and energy prices, was even higher at 3.8%. Many economists had predicted an increase here of 3.7%, a slight difference from the actual – but this small difference shows us that inflation is not yet in line with the Fed’s high interest rate protocols. 

From March 2022 to July 2023, the Federal Open Market Committee (FOMC) raised the funds rate from near-zero to the current range of 5.25%–5.5%, in order to slow the economy and hold back inflation. At the end of 2023, with inflation decreasing toward the Fed’s target of 2%, the FOMC projected three quarter-percentage point decreases in 2024, and some observers expected the first decrease might be this spring. Now it seems that the Fed will have to wait to reduce rates.

In theory, higher interest rates should put a damper on consumer spending and help bring prices down by suppressing demand. But interestingly enough, consumer spending has remained strong. In March 2024, personal consumption expenditures rose at an unusually strong monthly rate of 0.8% and the job market has also stayed strong, with unemployment below 4% for 26 consecutive months and wages rising steadily. One concern with keeping interest rates high for too long is that it could slow the economy too much, but that is clearly not the case, making it difficult for the Fed to justify rate cuts₂.

So, when can we expect inflation to cool off? Well, current indicators are not low enough in the face of strong employment and consumer spending to suggest the Fed will reduce interest rates anytime soon. Luckily, though, it’s also unlikely that the Fed will raise rates. For now, the central bank seems ready to give current interest rates more time to push inflation down to a healthy level, ideally without significant slowing of economic activity.

In fact, Federal Reserve official Neel Kashkari reiterated the Fed’s wait-and-see approach about possible rate cuts, which he has already called unlikely. In a recent interview, Kashkari, who serves as the ​​president of the Federal Reserve Bank of Minneapolis, said, “Right now, we’re in a good position because the labor market remains strong in the U.S.,” Kashkari told CNBC. “So, we have the luxury of being able to sit here until we gain confidence on where inflation is headed₃.”

While these words don’t offer any immediate relief, we can take some comfort that we’ve passed the worst of it (for now), and there is light at the end of the tunnel. Continued higher prices mean you may need to be more strategic about spending coupled around a downside risk mitigation investment system to preserve capital and to stretch your income.

So as always - be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc.

We do not offer tax or legal advice. Jeff can be reached at jeff@cutterfinancialgroup.com. This information is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk, including the potential for loss. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Market data and other cited or linked-to content is based on generally available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A, Appendix 1, applicable Form ADV 2Bs and Form CRS as well as the firm privacy policy. Please contact us to request a free copy via .pdf or hardcopy. 1. https://tinyurl.com/munuvdyt  2. https://tinyurl.com/32eva2fa  3. https://tinyurl.com/ss7hfepf