The consumer prices rose by 6.2% from October 2020 to October 2021, marking the fastest pace since November 1990. But what does this 6.2% rise actually mean? And how can this decrease in purchasing power be compared to what you can earn by investing your money? What about how it compares to adjustments aimed at combating rising prices? Here are some ways to put the latest inflation rate reading in perspective.
Investments
Here’s how a 6.2% inflation rate can compare to what you could earn in one year by investing your money. The inflation rate is over 100 times higher than the average interest rate of 0.06% on a savings account (the type of account your grandparents relied on to help them build their nests). It is 44 times higher than the average annual yield on a one-year certificate of deposit of 0.14% (and even a good one-year certificate of deposit only gets you about 0.85%). The ten-year annualized return of the S&P 500 stock market index is 13.9% as of October 29, based on price appreciation but before taking inflation into account. Over the past year, the S&P 500 produced a return of about 30%, also before accounting for inflation. “Everyone understands their accounts have lost value when the stock market goes down because you can see it,” said Matt Matygian, CEO of Blue World Asset Management. “But when it comes to inflation, you can’t see the decline in the value of your portfolio, but the losses are no less significant.” Homeowners are having a good year due to rising home prices during the COVID-19 pandemic, which increased by 19.8% in August compared to the previous year, according to the S&P CoreLogic Case-Shiller Home Price Index (although the increases have stopped accelerating). That’s more than three times the inflation rate. Investing in gold, often considered a hedge against inflation, would actually have cost you money over the past year. The price of gold fell slightly over the past 12 months – less than 1% on the most actively traded contracts – but it is gaining strength amid inflation worries. On November 11, gold closed at $1868.50 per ounce – its highest level since mid-June.
Cost-of-Living Adjustments
Here’s how the inflation rate can compare to adjustments that are supposed to counteract the effects of inflation. Social Security beneficiaries will receive a 5.9% increase in their benefits next year to help maintain retirees’ purchasing power in the face of inflation. This adjustment is the largest cost-of-living adjustment since 1982, far exceeding the annual average increase of 1.4% since 2010. Wages and salaries rose by 4.2% in the third quarter compared to the same quarter last year, marking the largest jump since at least 2002, according to the Federal Reserve Bank of St. Louis. But once inflation is factored in, many employees are still losing ground. In fact, real average hourly earnings fell by 1.2% in October compared to the same month in 2020.
Some High-Value Items
The 6.2% increase is a broad average when considering everything, but there are very significant price changes by category. For example, beef and veal prices soared by 20.1% over the past 12 months leading up to October, and used car prices rose by 26.4%, while personal care products only increased by 0.2%. In some cases, there is a delay in the reported increases (such as rent, for instance, which only rises once a year, if it does at all). Here’s how this 6.2% rise can compare to some of the larger recurring costs you may face, whether before the pandemic or now. From January to October, the national average rent rose by 16.4%, surpassing the average increase for the same months from 2017 to 2019 of 3.2%, according to research from Apartment List, an online marketplace for apartment rentals. Although the pace of monthly increases has slowed since hitting a peak of 2.6% in July, the figure from January to October is still more than 2.5 times the current inflation rate. Tuition and college fees increased more than 5% between 2001-2002 and 2012-2013. But reversing this trend in the 2021-2022 academic year, published tuition and fees declined on average after accounting for severe inflation. After adjusting for inflation, the published tuition and fees at private, non-profit four-year institutions fell by 1.65% to an average of $38,070 from the previous year, while public four-year schools dropped over 2% to $10,740, according to the College Board.
Does
Do you have a question, comment, or story you would like to share? You can contact Medora at the email address medoralee@thebalance.com.
Sources:
– Bureau of Labor Statistics.
– Federal Deposit Insurance Corporation.
– S&P Global.
– Social Security Administration.
– Bureau of Labor Statistics.
– Apartment List.
– College Board.
Source: https://www.thebalancemoney.com/putting-the-latest-inflation-reading-into-perspective-5210056
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