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The Long Tail of Inflation

Posted November 17, 2023

Zach Scheidt

By Zach Scheidt

The Long Tail of Inflation

This week we got two important reports on inflation.

One of the reports showed that inflation leveled off in October, while the other indicated that prices actually fell last month.

The consensus now seems to be that we’re finally turning a corner on inflation after years of higher prices.

Now, don’t get me wrong. It’s certainly a relief to see inflation cooling off a bit, but I think it’s way too early to start celebrating.

We still have a long way to go before inflation works its way out of our economy. And until it does, it’s still a major concern — for you personally and our country.

Allow me to explain…

Every Silver Lining Has a Cloud

Earlier this week, we got the latest Consumer Price Index (CPI) report, an indicator of what’s going on with inflation as it applies to individuals like you and me. 

The CPI came in flat for October, which essentially means that month-over-month inflation has leveled.

Investors were encouraged by the positive news, anticipating that cooling inflation could help lead to a soft landing for the economy.

Then on Wednesday we got the Producer Price Index (PPI) report, a measure of how much producers receive for their output. This index decreased by 0.5% last month.

This was the biggest monthly drop in inflation since April 2020!

Obviously, stabilizing prices is a welcome relief, especially after the past few years. But many people are overlooking the broader context of these numbers.

To turn the old saying on its head, remember that every silver lining has a cloud. Here’s what I mean…

Although inflation cooled off in October, both reports this week showed prices continue to climb in the long term.

Year-over-year inflation on the PPI was 1.3% while the CPI showed prices rising 3.2% over the past year, which is still concerning.

In other words, the data on inflation may be good news in the short term. But the economy isn’t quite as strong as we want to believe.

If you’re still not convinced, here’s further evidence that we may be in trouble…

Another Red Flag for the Economy

Along with the inflation reports this week, we got data showing retail sales down 0.1% in October, the first time they’ve fallen since March.

That may not sound like a big deal, but it’s certainly alarming heading into the holiday shopping season.

If you’ve been following along for a while, you may already know that I’m concerned about the state of today’s consumer.

That’s because middle and lower-income families have completely spent their pandemic savings and are starting to feel the full effects of inflation.

We can see this fact in rising credit card balances alongside delinquencies on credit card debt and car payments.

And to make matters even worse, the high interest rate on this debt puts struggling consumers in an even tougher spot.

That’s why I expect weak retail sales as we head into the holiday season. Now, this decrease in spending won’t only impact the major retailers…

Roughly 70% of the U.S. economy is based on consumer spending. So if spending weakens, the overall economy will suffer — no ifs, ands, or buts about it.

To put this week’s economic data into perspective, inflation is cooling down, which certainly is a positive.

But it’s largely because consumers are struggling and not spending as much money, which is a red flag for the economy.

One final thing to remember is that price levels are still way higher than they were just two or three years ago.

Think about it this way: we rode the elevator up when inflation was at 6%... 8%... and then 9%. Now we may have gotten off the elevator, but we’re still taking the stairs up.

In other words, prices are still rising year over year, just at a less alarming rate than they had been.

Unfortunately, the damage has already been done. And this is impacting anyone on a fixed income, namely retirees who rely on their hard-earned savings.

This just goes to show why the income opportunities we highlight here at Rich Retirement Letter are so important.

If you’re not proactive about generating extra income, inflation will slowly (or sometimes quickly, as we’ve seen lately) eat away at your spending power.

Bottom line, this week’s inflation news may come as a relief, but don’t get fooled into thinking we’re in the clear.

So stay tuned as we share the best income opportunities in today’s challenging market.

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