Ask Chuck: How long before inflation is under control?

Dear Chuck,

Inflation is hitting our family hard. We keep hearing it is coming down, but it does not seem that way when I go to the grocery store! When do you think we might see it return to normal?

Irritated Over Inflation

Dear Irritated Over Inflation,

You’re not the only one. Before the Israel-Gaza war, the April Pew Research Center report showed that a large majority of Americans are dissatisfied with the economy and the overall condition of our nation. In addition, confidence in the future has fallen from a year ago. You are right to be concerned about inflation. Some call it the “invisible tax” or the “silent thief.” No doubt, it robs families of the purchasing power of their income.

The silent thief

The Federal Reserve Bank of Cleveland reported in a paper titled “The Long-Run Costs of Higher Inflation” by Jean-Paul L’Huillier Bowles and Martin DeLuca, “Inflation imposes significant costs on society.” These costs appear in skewed markets and loss of purchasing power. Higher prices force consumers to invest less in order to have more cash on hand. In addition, inflation’s effect on taxes alters investing practices. When wages don’t rise along with prices, fewer goods and services are purchased, which negatively impacts business. Consumers negotiate wages more frequently and devote time and energy to coping with rapidly rising prices, and banks often decrease lending. (More here.)

How long will it last?

Bankrate’s Third Quarter Economic Indicator Poll reports that many experts don’t expect inflation to settle in at the Federal Reserve’s 2% goal until some point near the end of 2025. Twenty-nine percent expect inflation will cool by the end of 2024, and 29% say 2026 or later. No economists expect it to reach the Fed’s target by the end of this year. Yelena Maleyev, senior economist at KPMG, says, “The concern is rising food and energy prices which could have inflationary effects on other areas of the economy.”

The International Monetary Fund warns of stubborn inflation and weaker global growth in 2024. It increased the pace of consumer price increases across the world to 5.8%, up from 5.2% just three months ago.

Consumer sentiment is turning negative

I’ve summarized The University of Michigan’s Consumer Sentiment Index report here:

“Nearly all demographic groups posted setbacks in sentiment, reflecting the continued weight of high prices,” reported Joanne Hsu, director of the university’s Surveys of Consumers. The index fell 7% from September to October, influenced by the war between Israel and Hamas, a spike in bond yields, and political dysfunction. Bill Adams, chief economist at Comerica Bank, wrote, ‘The impasse over the next House Speaker could be adding to fears of a government shutdown in November; the UAW strike; the restart of student loan payments; and the recent uptick in long-term interest rates could be affecting sentiment, too.’

The Consumer Price Index rose 3.7% in September from over a year ago. Higher oil prices pushed up gasoline prices, although there is easing in parts of the country. The cost of rent remains elevated. Gregory Daco, chief economist at EY-Parthenon, told CNN, ‘The tremendous degree of uncertainty around the Israel-Hamas war means it’s very difficult to predict the potential economic fallout.’”

Personal savings rates are increasing in Europe

The Federal Statistical Office found that the savings rate in Italy registered at 2.1%, the United States at 3.7%, Japan at 5.4%, Austria at 8.8%, and Germany at 11.1%. Only the Netherlands at 12.7% and Switzerland at 18.4% surpassed Germany. It is a paradox because German consumer sentiment was -26.7% in October and is expected to fall in November. This has pushed saving to its highest level in over a decade. Unlike many Americans, Germans have a cautious approach to money; they emphasize financial stability and long-term planning. COVID-19 and the uncertainty it caused in the economy pushed them to save more instead of spending. The population’s high level of financial literacy makes saving for emergencies, retirement, and major purchases a priority. This results in long-term economic growth but negatively impacts businesses and overall economic activity with decreased spending on goods and services.

How people are coping in America

• Prioritizing lower prices over convenience.
• Stockpiling sale products.
• Buying regular fuel instead of premium.
• Tracking gas deals and usage.
• Cutting back on discretionary purchases.
• Skipping vacations.
• Postponing health care.
• Increasing credit card debt.
• Decreasing savings.

Adjust your budget and perspective

Financial experts suggest cutting back on groceries, eating out, gas, self-care, entertainment, and travel to gain margin in your budget. It also helps to keep it all in perspective. Economic conditions can change quickly. Adjust what you can while continuing to give generously and save for the future. Our real treasures are not here; they are being laid up in Heaven where inflation cannot steal them.

If credit card debt is a financial burden for you or someone you know, reach out to Christian Credit Counselors. They are a trusted source of help toward financial freedom.