If Inflation is Going Down, Why Are Eggs Still Expensive? Disinflation, Explained:
February 13, 2023
By Krista Eberly, CFP®, CIMA®
Investment Management Officer Inflation is a topic on everyone’s mind. It drove financial markets in 2022 and remains a focal point thus far in 2023. Recently, we have seen some relief on the inflation front. Federal Reserve Chairman Jerome Powell mentioned this in his press conference following the Federal Open Market Committee meeting on February 1. In particular, he referenced a ‘disinflationary process is underway but in its early stages.’
Different Types of Inflation
There are different types of inflation. First, let’s start with the basic definition. Inflation is the general rise in the prices of goods and/or services in the economy. For example, if I buy a dozen eggs a year ago at $2 and this year it costs me $2.10 for the same quantity; that is inflation. On the flip side, if prices fall from a year ago to today (i.e. $2 to $1.90), that is known as deflation. We are not there.
As Chair Powell discussed in his press conference, we are in a period of disinflation. That is when prices still increase but the rate of change slows. In the example above, I noted that eggs over a year went from $2 to $2.10 (this is a hypothetical example – call me if you find eggs at this price!). That is a 5% year-over-year change. If egg prices go from $2.10 this year to $2.15 next year, that is a 2.4% increase. The price of eggs continues to move higher, just at a slower rate than previously. This is what the U.S. economy is currently experiencing overall.
Disinflation in the U.S. Economy
The Consumer Price Index (CPI), a key measure of inflation for consumers, peaked at 9.1% on a year-over-year basis back in June 2022. Since then, prices are increasing, just at a slower pace, i.e. disinflation. Over the past three readings of CPI, we have seen welcome reductions in the pace of price increases. The year-over-year headline CPI reading was 7.7% in October, 7.1% in November, and 6.5% in December.
Chair Powell welcomed these lower readings but reiterated that inflation remains well above the Federal Reserve’s longer term 2% goal. Markets seem to be anticipating a quicker Fed reversal to a more accommodative policy stance than we believe is likely. There’s an old investment saying, ‘Don’t fight the Fed’. We see continued market volatility well into 2023. We will invest conservatively given this outlook.
An Update on Inflation
This week we receive an update on the inflation front with the January release of the Consumer Price Index on Tuesday. The current expectation is that the headline figure will tick down to 6.2%, from the previous annual pace of 6.5%. If inflation comes in above or below forecast it will play a factor into where stock prices and bond yields end the week. Stay tuned!
Have you recently reviewed your financial plan to ensure higher inflation has not dented your ability to achieve your long term goals? If not, please call or contact us to set up a review. Your ability to achieve your financial goals over time matters to us.