Don’t Let Talking Heads Fool You, Inflation Is Running Rampant

Inflation has been hovering above the 3% threshold for more than three years, perpetuating the sticker shock consumers have been experiencing since the pandemic. Every monthly increase to the Consumer Price Index (CPI), no matter how modest, is heaped on top of already elevated prices, creating a dangerous compounding effect as well as a boiling frog phenomenon for the unaware.

You have to look beneath the surface for a reality check. In April, the CPI inched higher by 0.3% month-over-month, beating consensus estimates and suggesting that inflation is finally cooling. But over the past 12-month period, prices are up a steeper 3.4%, far above the Fed’s 2% target. That explains why households have yet to feel any relief in their electricity bills or at the grocery store.

Unfortunately, conditions are even worse than they appear. In 2023, consumer prices hovered nearly 5% higher than they were in 2022, demonstrating the compounding effect that’s unfolding. Since the pandemic, inflation has climbed a shocking 21% higher, as noted by the Irrelevant Investor, with some categories even surpassing that rate.

Price increases are more apparent in individual categories that comprise the CPI than the broader index, more than 50% of which are rising at a 4% clip or higher on average, with segments like auto insurance and healthcare causing the most pricing pain.

Stock Market Disconnect

Nevertheless, based on stock valuations, it appears there’s a disconnect between the stock market and interest rates as investors celebrate the Dow Jones Industrial Average’s 40,000 milestone amid a major rally that put it over the top. Investors are bullish but appear to be sticking their heads in the sand on inflation, as though there’s an interest rate cut waiting just around the corner, or at least in September. Or maybe they’ve simply stopped caring.

The reality is the Fed’s efforts to combat inflation have been one step forward and two steps back, resulting in nothing but uncertainty on monetary policy strategy. By the looks of things, Fed Chairman Jerome Powell would be hard-pressed to cut rates with unwieldy inflation still roaring its ugly head. By drilling down into the numbers, it becomes clear just how much and quickly prices have been increasing of late, creating a new normal in a post-pandemic economy.

The following data represents price increases for individual categories that go into the CPI over the last 12-month period, as reported by the Bureau of Labor Statistics: