The true impact of consumer inflation is not good. Now, that may seem like a simple statement, but the media coverage again compels me to discuss what is really happening. The small reduction in monthly inflation in December is welcome, but far too little to have any fundamental impact. To understand the true impact of consumer inflation we need to look across 2 years. Why do I suggest looking at a 2 year time frame? Well, the true impact of inflation is not clear when viewing only 2022. Here is a chart showing each of the years and a combined total.
Chart of 2-year US inflation rate by month
The impact over 2 years
Careful review of the 3 lines in the above chart tell a more complete story of the true impact of consumer inflation. Take the month of April as an example. Inflation in April 2022 was 8.3%, on top of 4.2% in 2021, making for a combined total of 12.5%. In contrast, December’s combined 2 year rate was 13.5%, because while the monthly rate in 2022 declined, it still represented a significant increase over the highest month reported in 2021. In fact, this means that the 2 year inflation has been relatively flat since May 2022, hovering around 13.8%. The trend line from the end of 2022 does look like its moving in a good direction, but the impact of 13.5% inflation for consumers is having dire consequences seen in rising debt, slowing retail sales, and tough choices for consumers.
What about falling gas prices?
Thankfully gas prices have fallen from the highs of early 2022, which is a welcome reprieve from what could have been unimaginable hardship, but to claim that consumers saw significant relief is a fraud. Gas prices are still higher than they were 2 years ago, and even with the reduced gas prices, 2-year inflation was STILL double digit as 13.5% in December. This was little consolation to consumers who found grocery prices skyrocketing for months and therefore struggle with hard choices. To project this logic forward into 2023, if inflation for January drops to 6%, the 2 year rate will remain at 13.5% when added to the January 2022 rate of 7.5%.
Unfortunately the inflation issue is not over, and the consumer will be under significant pressure throughout 2023. This can become more of a self fulfilling prophecy as consumers and businesses fearing inflation will place more demands on wage growth, government relief, and upward future goods pricing.
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