Inflation outlook


Russell Price, Chief Economist – Ameriprise Financial

 

Our everyday lives are costing us more. According to the Labor Department’s Consumer Price Index (CPI), the cost of everyday goods and services was a sharp 7.9% higher in February versus a year earlier – the fastest pace of increase in over 40 years.

Here’s our view on where inflation may be heading and what to consider in this environment:

Will the pace of inflation moderate in the months ahead?

Keep in mind that inflation measures price changes relative to their levels a year ago, so prices don’t have to outright decline for the rate to ease. The pace of price increases simply needs to slow. And we believe there is good reason that could be the case for many goods and services in the months and quarters ahead.

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%1 but they would represent a noticeable deceleration from current levels.

Higher prices should be expected to hamper consumer purchasing power over the intermediate term, at least, but wage increases have also been strong, especially at the lower end of the wage spectrum. 

Regardless, improvements in inflation will likely develop slowly. And we remain concerned about energy prices.

The average price of gasoline leapt 38% in February compared to a year prior. Energy commodity prices (i.e., crude oil), have shown few signs of easing anytime soon as geopolitical tensions, particularly in Ukraine, offer the prospect of supply disruptions. Global energy producers have also been slow to invest in supply-expanding projects as global demand has rebounded.  

Consumer considerations

Given the breadth of increases, it’s hard to avoid today’s higher prices. But consumers should consider that the value of what they already own has also increased.

For example, here are two items that have experienced material price increases over the last several quarters:

  • Automobiles: In January, the price of new vehicles was up approximately 10% year over year and, for used vehicles, the increase was a remarkable 40.5%, according to the Labor Department. While this may be unwelcome news to those looking for a new vehicle, prospective buyers should benefit as the value of trade-in vehicles has gone up even more.
  • Housing: The median price of an existing home rose 16.4% in 2021, according to the National Association of Realtors, boosting the net worth of current homeowners materially.

What can investors do?

There is no magic formula to perfectly inflation-proof a portfolio. Even gold, a long-perceived key inflation hedge, gained a modest +3.3% over the second half of 20212 as inflation surged. Over the same period, the S&P 500® Index was 10.9% higher.

That said, certain investments do tend to do better than others during periods of inflation. Year-to-date, the S&P 500 Energy Sector has materially outperformed the broader S&P 500 Index as energy companies see much higher prices for their products. Financials have also been outperforming the index as higher expected interest rates can benefit profitability on their loans.   

But should investors generally avoid equity markets during periods of inflation? No, not in our view.  Companies’ sales and earnings can broadly benefit from being able to charge more for their goods and services during periods of heightened inflation.   

Also, an examination of stock performance during periods of high inflation often starts with a look at the results seen during the 1970s. Economic conditions during that prior period, however, were also highly influenced by activity-draining energy shortages, not just higher prices. Today, the U.S. economy is largely energy independent. We believe price pressures should moderate as supply chain operations improve with a reduced COVID threat over time.

Contact your advisor

If you have questions or concerns about these or other topics, 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.