Is Inflation Slowing Down? (2024)

Key Takeaways

• Inflation is heading back down since reaching 9.1% in mid-2022 - the highest it’s been in over 40 years
• The Fed has raised interest rates 10 times in a row as a result, with rates the highest they’ve been in 15 years
• It finally seems to be working, as headline inflation (CPI) is now back to 5%, though this is still double the Fed’s target range of between 2-3%

There’s probably never been a time in the last 30 years that inflation has garnered so much attention. It’s gone from a boring economic metric that regular people just didn’t really care about, to one of the hottest topics of conversation.

It’s on the news, it’s all over social media, and discussion around rising prices is brought into real life conversations almost every day.

And it’s not a surprise. We’re all feeling the heat from the rising cost of living, and especially given that the economy is on somewhat shaky footing, and there’s been significant layoffs in tech. It’s a worry.

But, it’s not all bad news. We’ve started to see inflation slowly come back down to earth. Almost every month, the headline annual rate heads down just a little, though it’s happening much slower than most of us would like.

Let’s go through exactly where we’re at with inflation right now and see what it might look like in the coming months.

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What’s happening with inflation right now?

Inflation has been on the rise since the beginning of 2021. It went from below 2% in 2021, to hit a high of 9.1% on an annualized basis back in June 2022. That figure was the highest that inflation had been in over 40 years, with the last time prices were rising at that level being experienced back in 1981.

Since June last year though, the headline figure has slowly come down every month since, with the latest figures for March coming in at 5.0%.

Not only is that figure significantly down from the highs of mid-2022, it’s also now coming down at a slightly faster rate than expectations, with forecasts for the March numbers predicting a rate of 5.2 - 5.3%.

So to answer the question, yes, inflation is slowing down. But it’s still far higher than economists and, most importantly, the Federal Reserve want it to be. Part of the Fed’s job is to adjust interest rates in an attempt to keep inflation in check, and they target an inflation range of between 2-3%.

So by that metric, even though inflation is slowing down it’s still around double what it ‘should’ be.

Why inflation is a problem

If you’ve had to pay any bills, buy groceries or pay for childcare over the last year or two, you’ll have felt first hand why inflation is such a problem. When prices rise, it puts significant pressure on households to be able to continue to afford their regular living expenses.

The reason this is such an issue is because incomes almost never match rising prices, meaning we’re all forced into playing a game of catch up. Struggling to earn more just to slow the damage of inflation.

Not only that, but inflation has a hugely damaging effect on savings. As inflation rises, the purchasing power of our money decreases. If you had $10,000 in savings ten years ago, that would have paid for significantly more than it does today.

To use a simple example, if inflation is 10% it means the cost of goods and services has risen by that amount on average over the past year. So if you have $100, the purchasing power of that money (the amount of stuff you could buy with it) has gone down by 10%. So while you still have the same $100 bill that you had last year, it now only buys you what $90 would have bought you then.

Why did inflation spike in the first place?

There’s been a combination of factors that have added to the inflationary problems, and there’s no black or white answer. The pandemic lockdowns created a perfect storm for rising prices.

Supply chain problems meant fewer goods and services were available (remember the delays for PS5’s and cars due to the microchip shortage?), driving up prices. There was also significant pent up demand, as economies unlocked and people wanted to make up for lost time.

As well as that, we had huge levels of money printing and government spending on support during the Covid period, increasing the money supply. We also saw Russia invade Ukraine, putting pressure on specific sectors such as energy and agriculture.

Overall there have been a lot of factors playing a part, and economists have differing opinions on which of these were the main drivers - if there even is one.

The Fed’s fight to tackle rising prices

This has led the Fed to take serious action with interest rates. They’ve hiked rates at the fast pace we've seen in decades, ending a sustained period of rock bottom rates going back to the 2008 financial crisis.

The purpose of higher interest rates is to make borrowing more expensive. Things like mortgages, credit cards and other forms of credit and loans are all tied to the Fed’s base rate, meaning consumers pay more interest as rates go up and less and rates go down.

By raising rates, and household interest costs, the idea is that they will have less money to spend, which slows economic growth. Obviously this doesn’t come without a cost, and there’s been consistent talk of a potential recession as the Fed aims to slow the economy.

In the short term, it also meant that households have been squeezed from both directions.

The outlook for inflation

Even though it’s been a difficult period, it does look like the Fed is winning its battle against inflation. The rate of price rises have come down consistently now for months, and there’s nothing to suggest that this trend will change.

The Fed has stated they may look to pause their cycle of rate hikes, as falling consumer spending and layoffs combined with the banking crisis cause an environment that is seeing the economy slow and inflation go with it.

We could see inflation hit the Fed’s target range over the next few months, but of course there’s always the potential for an economic curveball.

The bottom line

Inflation is finally slowing down. But, it’s still high by historical standards. The likelihood is that we will see it come back down to the normal range at some point this year, but of course nothing is guaranteed when it comes to the economy.

For investors, there are a few different ways to play this. If protecting yourself against inflation is the main thing you’re worried about, you should look for investment assets that are designed to do that.

But there’s another side to this coin. Right now the economy has been hammered from all sides, including the Fed, in a bid to get inflation down. And it could mean we’re heading for a recession. So for investors who are worried more about a recession than inflation, that’s going to take a different approach.

It’s the latter situation which led us to create the special edition Recession Resistance Kit. It’s designed to perform if we do drop into a recession, investing in stocks that have the ability to hold up better than most, as well as some that might even benefit from a recession.

Our AI is tasked with the job of crawling through huge levels of data each week, making predictions and automatically rebalancing accordingly.

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