When it comes to inflation, no news is good news. And the news on inflation last month looks, certainly, like “no news”: at 3.1% in November, it dropped down by an imperceptible 0.1% from October. But when we zoom out to look at the bigger picture, we see encouraging signs. Consider where we were at in June 2022, when inflation was at a peak rate of 9.1%.
According to Moody’s Analytics Chief Economist, Mark Zandi, “Inflation is still on the high side of what I think everyone would feel comfortable with, but it’s coming back down to earth steadily but surely.”
So, while inflation has been sticky, it hasn’t been stuck. This month, you’ll notice lower prices at the pump: gas prices fell by 5.8% month over month in November, fueling (heh) the inflation cooldown. They’re at their lowest level in almost a year, just in time for any cross-country road trips you were planning for the holidays.
But there are plenty of reasons the Fed is approaching these numbers with caution (after all, they can’t just call Taylor up). Core inflation, which strips out volatile categories like food and energy, has been stubborn, up by 4% from a year earlier. Housing costs, for example, have been more difficult to wrangle down.
But wait — before we get into what this all means for you, let’s talk about what’s driving these numbers, and how you should be handling your money.
So what drove last month’s change in inflation, and what should you do with your money in times like these? Let’s break it down.
First: How is inflation measured?
Inflation is the upward creep of the prices of goods and services. It usually happens because the demand for goods and services is rising faster than companies can produce and supply them. That makes them more scarce, which makes them more valuable, which pushes prices up. When wages don’t rise to match, that creates a decrease in purchasing power. (Translation: Things cost more and you’re not making more, so you can’t buy as many things.)
Inflation is often measured using a standard benchmark called the Consumer Price Index (CPI), which you might have heard of. The CPI is calculated by looking at a standard set (“basket”) of goods (food, medical care, clothing, etc) and averaging their change in price over time.
There’s also a measure called “core inflation,” which is basically all that stuff, minus food and energy prices. It can be easier to judge what’s really happening in the economy when you exclude them, because food and energy tend to be more volatile, driven by short-lived factors, and just overall less reflective of economic health.
And the last measure to know about is called Personal Consumption Expenditures (PCE). It’s a bit broader than the CPI and weighs some things like health care a bit more heavily. It’s also the measurement that the Federal Reserve considers the most when they make policy decisions.
What drove November 2023’s inflation numbers?
While we have gas prices to thank for last month’s inflation slowdown, there are other factors applying pressure in the upward direction. Specifically, shelter costs, aka housing, aka the rent is too damn high.
In November, rent prices were up 6.9% over the past year, which keeps upward pressure on inflation. According to the the Harvard Joint Center for Housing Studies, a record number of tenants allocate half or more of their income to rent, which means that, by the federal government’s measure, rental housing is unaffordable for a lot of folks right now. (If this is an issue close to your heart, read Dr. Sylvia Kwan's recent piece on the power of investing in affordable and workforce housing.) The Bureau of Labor Statistics says that shelter accounted for 70% of the total increase in core CPI over the past year.
There are other categories, of course, to consider when evaluating inflation’s stickiness. Motor vehicle insurance rose by a whopping 19.2% and motor vehicle repairs rose by 12.7%. If you were planning on gifting tickets to sporting events this holiday season, you may really feel the squeeze: admission prices rose by 16.4%. Grocery prices, however, have slowed down, which may help offset some of those costs as you prepare for your holiday feasting.
What does this all mean for interest rates? They’re likely to hold steady for now. And experts are optimistic enough to predict interest rate cuts in the first half of 2024.
How should you manage your money right now?
It’s impossible to know what will happen in the future, especially right now, but here are some things to think about.
Don’t keep more than you need to in cash
This is something we say anyway — but when inflation is high, cash gets less valuable, so the advice becomes even more urgent. Here’s what we recommend always keeping in cash (as in, in an FDIC-insured bank account):
Money to pay your bills
Your emergency fund (three to six months’ worth of take-home pay)
Savings for short-term goals (things you’ll need money for in the next one to two years)
If you’re the kind of person who tips a little more toward “cautious” on the risk tolerance scale, you could consider adding a bit more to your emergency fund — if things are going to cost more later, your savings might not go quite as far.
But for the rest of your money, we typically recommend investing it.
Shop around for the best interest rates on savings
Higher federal interest rates lead to higher interest rates paid by savings accounts. If you have a large chunk of cash in the bank (like a complete emergency fund, for example), see if you can find a savings account paying more.
Keep investing regularly
If you’re investing for long-term goals (those more than a few years away), we’d probably recommend that you just keep doing what you’re doing. Every period of inflation is different, and in the past, it’s affected different types of investments in different ways (which is, after all, the point of having a diversified portfolio).
We do know (and as we’ve seen this year) periods of economic uncertainty tend to make the markets nervous, which can lead to volatility. So we recommend using a technique called dollar-cost averaging, which means investing regularly, a little bit at a time, no matter what’s going on in the market. You’ll end up investing when markets are up and down in a way that evens out over time. It takes the timing guesswork out of it.
Plus, we don’t know how long higher inflation will last — there’s always a chance that it could slow sooner than experts expect. Either way, the longer your timeline, the less inflation is likely to impact your eventual bottom line.
(By the way, when you invest with Ellevest, we take hundreds of different economic scenarios — including ones like this— into account as we build your forecast.)
TL;DR: We don’t know how long this period of higher inflation will last. All we can do is try to make the best choices we can with the information we have — and adjust along the way.
Disclosures
