Seeking clarity on inflation

February 03, 2023
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Q: The inflation picture continues to puzzle and frustrate me. On one hand, I pay a lot less at the gas pump than I did six months ago. On the other hand, the price of eggs has gone through the roof. I know I buy a lot more gasoline than eggs, but I think you get my point. How come the pundits are talking about inflation going down when my simple standard of living is a lot more expensive today than it was a year ago?

A: You are not alone in your frustration. In the course of my day-to-day, I have the opportunity to talk with a lot of people about their financial lives. Many people from all walks of life have felt the pinch of inflation over the past 18 months. Unfortunately, inflation seems to hit those with lower incomes the hardest. Here are some things to think about when it comes to inflation.

When we talk about inflation, we first need to get settled on some vocabulary. Inflation refers to an increase in prices, deflation refers to a decline in prices, and disinflation means a reduction in the rate of inflation. When pundits or others say that inflation is going down, they are really describing disinflation. Prices are still going up, but they are rising at a slower rate than before.

I recently took a closer look at monthly consumer price index (CPI) data between January 2015 and December 2022. If you could see a chart of the data, you would notice three distinct intervals during that time period. Between January 2015 and December 2020, inflation grew at a very low 1.8 percent annual rate; between January 2021 and June 2022 the CPI surged sharply higher to an 8.4 percent annual rate; since July 2022, it has decelerated to a 2.8 percent annual rate. In other words, for the past six months we have seen significant disinflation. Prices are still rising, but they are rising much more slowly than they did during the inflation surge.

If you are feeling a little nerdy—and I hope you are—you can look at inflation data for yourself on the FRED website. FRED is a free website maintained by the Federal Reserve Bank of Saint Louis that has reams and reams of economic information. Simply do a Google search on the term “Fred CPI” and you will find a link to something called “Consumer Price Index for All Urban Consumers”. Clicking on that link will take you to a chart of the CPI going back to 1947.

As you study the chart, you will see a couple of things. First, the slope of the line represents the rate of inflation. The steeper the slope, the higher the inflation rate. If you look closely, you will see a clear and sustained acceleration in inflation (a steepening of the line) starting in the late 1960s and lasting until the early 1980s. That 15-year period is known to economists as “The Great Inflation.” Subduing the Great Inflation took monumental effort by the Federal Reserve, including two back-to-back recessions. The lessons learned during that inflation fight still echo in the halls of the Federal Reserve today.

Second, you will see that the CPI almost always goes up. In fact, there are only two periods of actual price declines and they were very short-lived. The first happened in the fourth quarter of 2008 when consumer prices dropped 3.4 percent during the Great Financial Crisis. The other happened in early 2020 when prices fell 1.2 percent between February and May as the economy buckled under the worldwide COVID lockdown. In both cases, a more massive deflation was prevented by decisive Fed action.

My point in telling you this is to say that we will likely never see prices go back to where they were a year ago. To go back to those price levels would require deflation—a sustained decline in prices. Deflation like that is very rare. At this point, I’m afraid that the best we can hope for is a little more disinflation, meaning a further deceleration in the rate of price increases.

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Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to