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Inflation Is Cooling but Challenges Remain

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Why Americans May Continue to Feel a Financial Pinch

According to a recent inflation report published by the U.S. Bureau of Labor Statistics (BLS), the consumer price index (CPI) rose 4.9% in April, the smallest increase in two years.1 While slowing inflation may signal some relief for consumers, the current rate is still significantly higher than the Federal Reserve’s 2% target. In addition, high prices for key items continue to challenge many Americans’ budgets.

Despite a slowing inflation rate, there are three key challenges that continue to haunt Americans.

#1 – Interest rates continue to rise.

In an effort to battle rising inflation, the Federal Reserve continues to raise interest rates. On May 3, the central bank announced another 25 basis point increase, putting the interest rate at 5.25%, the highest it had been in 16 years.2

While it’s unclear whether the Fed is finished with rate hikes, high interest rates are impacting Americans in several ways:

  • Increased cost of borrowing – Consumers are paying higher interest rates on loans, including mortgages, car loans and credit card debt. The higher costs of borrowing are making it more expensive for individuals to finance major purchases, therefore limiting many families’ ability to invest and save.
  • More attractive returns – On a positive note, high interest rates are benefitting those who are able to save and invest. Savings accounts and fixed-income investments, such as bonds and certificates of deposit, are paying higher interest income to investors.
  • Challenges for business owners – High interest rates are making it more expensive for business owners to invest, expand operations and undertake new projects. This hinderance has the potential to stunt economic growth and limit job creation.

#2 – The cost of living is increasing.

Two main factors are currently contributing to a higher cost of living — food prices and the housing market.

  • Food prices – Over the 12-month period ending in April 2023, food prices increased by 7.7%, down from 8.5% in March.3 As recently as August 2022, 12-month prices for food at home increased by 13.5%, the highest percentage increase since the period ending in March 1979.4

Continued food inflation can have a ripple effect on the broader economy. As food prices rise, consumers’ purchasing power diminishes, which can lead to decreased discretionary spending on other goods and services. This impact can extend to different sectors, including retail, entertainment and travel, causing a slowdown in economic growth.

  • Housing market – Over the 12-month period ending in April 2023, the BLS shelter index increased by 8.1%, which accounts for more than 60% of the total increase in all items less food and energy.5 Adding to housing challenges is the fact that many Americans feel trapped in their homes as interest rates continue to rise. Those who purchased homes in 2021, for example, may have been able to lock in a 30-year fixed rate of around 3.4%. Purchasing a home at today’s mortgage rates would mean paying approximately 6.39% (30-year fixed). Not only does this increase make it difficult to sell, it also means that housing inventory isn’t keeping up with demand because many homeowners are staying put.

#3 – Wage growth is slowing.

Recent data shows that workers’ earnings are currently growing at less than 5% per quarter, down from 8% in 2021. Particularly hard hit are lower-paid workers in leisure and hospitality positions, as earnings for those jobs saw a 6% decline after having increased approximately 18% in the winter of 2021-2022.6

The combination of these three factors — rising interest rates, an increased cost of living and slower wage growth — means that even though inflation may be slowing, many Americans are still feeling a financial pinch.

What can you do to help offset the impact of these challenge economic conditions? A great place to start is with a custom-built, diversified portfolio specifically designed to meet your needs. At Creative Planning, we believe in the importance of protecting short-term living expenses by investing in bonds and other fixed-income vehicles, while providing growth and inflation-protection through a combination of equity strategies. The exact allocation depends on your financial situation, including your risk tolerance, time horizon and financial challenges, as well as your goals for the future.

Are you ready to take the first step? Get started today by scheduling a call with a member of our team.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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