Sometimes the 12-month inflation number reflects current price trends, but often investors need to dive deeper. Take February 2020 as an example. Both the 12-month inflation rate and the 3-month inflation rate were 2.3%. The long-term and short-term trend were the same.
Very quickly though, COVID hit, people spent less and while the 12-month inflation numbers dropped, the bigger story was that inflation was negative in March-June 2020. This set up economists and politicians to call inflation ‘transitory’ a year later in Spring 2021 when in fact it wasn’t.
12-month inflation is just today’s number divided by last year’s number. The negative inflation experienced in Spring 2021 created a ‘divisor’ that was lower than it would have been without the COVID crisis creating negative inflation during that time.
When April 2021 inflation saw a jump to 4.2% many people rightly pointed out the low number from April 2020 that was being used as a divisor. What was missed was that diving deeper into the numbers investors could see 3-month inflation was more than double at 8.6%.
Today the opposite scenario seems to be occurring. The Federal Reserve continues to point to a high inflation rate while the recent trend, especially since June 2022 continues to be much lower. Consider September 2022 when the 8.2% 12-month inflation seemed to be stubbornly high. Yet the 3-month number was only 0.7%!
To summarize, today’s inflation rate is currently being overstated due to the blunt instrument of year-over-year inflation being used to report it. It is important to dive deep into the inflation numbers to understand the recent trends. Ultimately, understanding these nuances of inflation can help people make better budgeting and long-term financial planning decisions.
Jeremy shared: “The main news stories around inflation are that the 12-month number is still high at 6.4%. Yet, that’s really a tale of two different time frames. 5-month inflation through June 2022 was higher than reported at 13.4%. Inflation the past 7 months since June is actually 1.7%. The Federal Reserve’s stated goal is 2.0% inflation and that’s been happening since June 2022!
Most people hear, ‘inflation is…’ and they need to understand that really means, ‘inflation was…’
Inflation was a certain percentage from January 2022 to January 2023, but that includes data that’s over 1 year old! And, if we’re looking ahead, Inflation reached some really high numbers in April – June 2022, which are likely to make the April – June 2023 inflation numbers look really good. All the signs are pointing to 12-month inflation numbers being reported as a big drop in April-June 2023.”
About Jeremy Keil
Jeremy Keil, CFP®, CFA is a retirement planning advisor and host of the Retirement Revealed podcast and blog. Go to his website to read more:
https://keilfp.com/blogpodcast/how-bad-is-inflation-really/
Disclosures: Advisory Persons of Thrivent provide advisory services under a “doing business as” name or may have their own legal business entities. However, advisory services are engaged exclusively through Thrivent Advisor Network, LLC, a registered investment adviser. Keil Financial Partners and Thrivent Advisor Network, LLC are not affiliated companies. Please visit our website www.keilfp.com for important disclosures.
