Inflation is everywhere: Cars and groceries cost more, your home heating/cooling bill is bigger, restaurant prices are up and more. When will there be relief?
Ameriprise Financial Chief Economist Russell Price answers the inflation questions clients are asking.
What is inflation?
Inflation is an increase in prices as measured across a broad range of goods and services. In the 2-years prior to the pandemic1, the U.S. inflation rate averaged 1.8%, according to the Labor Department. The impact of high inflation is what economists call a loss of purchasing power, meaning you pay more for the things you normally buy, which can reduce the quantity of things purchased.
What has caused higher inflation during the pandemic?
Surging COVID-19 cases over the past two years impacted the workers who ship and store all the goods we buy (i.e., the supply chain). Simultaneously, demand for goods increased as more consumers were at home not spending as they normally would on services such as vacations.
What are examples of goods and services?
Goods range from everyday items such as food and gasoline to durable items such as clothing, furniture, household appliances and cars. Examples of services are restaurants, doctor visits, airline fares and hair stylists.
Why is inflation still so high?
It is a combination of factors. But most of the recent higher prices have come from goods, rather than services. Some items, such as automobiles, have experienced parts shortages, limiting their availability. More broadly, fewer workers handling the jump in demand led to expensive bottlenecks at shipping ports, limited trucking transportation and overpacked warehouses. It will take some time, but demand should slowly ease as supply chains slowly increase the volume of goods being transported to retailers.
When will we get some relief?
Inflation could begin to ease as spring turns to summer. We currently project inflation, as measured by the Consumer Price Index, to end 2022 at a rate of about 5.0% to 6.0%. Such rates would still be much higher than pre-pandemic averages of just below 2% but they would represent a noticeable deceleration from current levels.
As virus conditions ease, some consumer spending is likely to shift back to services such as vacations, movies and concerts. This should allow the supply chain to further recover and reduce the pressure on prices for goods.
Is this a repeat of 1970s inflation?
The current U.S. inflation is not a repeat of 1970s inflation, in our view. Both periods have their own unique circumstances. Most notably today, the U.S. is largely energy independent. That is a drastic difference compared to the energy shortages of the ‘70s, which was a contribution factor to high inflation at that time.
Are certain products or services seeing more price hikes than others?
Automobiles, energy and food have experienced the largest price increases. In December 2021, new-vehicle prices were a remarkable 25% higher year-over-year, according to the Consumer Price Index. Used-car prices were up even more, rising 37% from the prior year.
What’s the outlook for car, energy and food prices?
Cars are in short supply due to reduced availability of semiconductors used by virtually all major automakers. It’s a global phenomenon but is slowly improving as more semiconductors become available. Auto and food prices should stabilize in the months ahead before declining modestly for a time. Energy prices, however, remain a wildcard as producers have yet to provide more crude oil and natural gas to help bring market prices down.
Does inflation affect my investments?
Inflation is part of the broader financial landscape for investors, rather than a singular, dominant issue. Investors should avoid making major changes based solely on inflation. There are other, equally important, influences to be considered.
What could help lessen the impact of inflation on my investment portfolio?
As long as inflation does not become entrenched — that is, lasting a long period of time — stocks can do well in an inflationary environment. If it supports your financial goals, risk tolerance and time horizon, you could consider allocating more to stocks with a history of solid dividend growth. That may provide a hedge against inflation for some investors. Dividends are a cash return on your investment in a stock. Dividends are not guaranteed and can be impacted by taxes and inflation.
If you have questions or concerns, your Ameriprise financial advisor is ready to help. Offering personalized advice based on your financial goals and needs, they can help you navigate market and economic cycles over time.