Asking for a Friend - I keep hearing so much about Inflation being higher than it has been in the past three decades. Is that true and what does it actually mean to me?

March 21, 2022

Q.  I keep hearing so much about Inflation being higher than it has been in the past three decades. Is that true and what does it actually mean to me?

A. Yes, 2021, and so far, 2022, the inflation rate is certainly higher than the “average” inflation rate we use in our plans. But if you average the past 22 years together, inflation is around 2.23% per year, and if you average the past three years it is 2.57% because 2019 and 2020 (especially) had low inflation rate years. If you look at the chart below, you can see that both 2019 and 2020 were years of lower-than-normal inflation. We believe that this is a result of an extremely low interest rate environment, pent up consumer spending post 2020 - 2021 lockdowns and continued supply chain struggles.

We understand that everyone is seeing higher prices at the grocery store, certainly at the gas station, and absolutely on travel; we also believe some of this isn’t tied to actual inflation from consumer demand, but instead on a spike in oil prices that trickles down.  The last time gas prices were as high as they are right now was July of 2008.  Back then the average was $4.10 per gallon, if you adjust that for inflation, it would equate to $5.44 per gallon.  We are not trying to downplay how this is affecting everyone; we feel the pain too, but we want people to understand how important it is to look at all the facts.  Averages are formed by highs, lows, and the numbers in the middle, and, we believe, need to be inflation adjusted to tell the whole story. 

In an attempt to reduce a continued high inflation rate, on Wednesday, the FOMC (Federal Open Market Committee) raised the target rate for the first time since September of 2018; it is now 0.25 - 0.50.  For a history of the Fed Funds Rate, we recommend reading this Bankrate article.  

The Central bank has a target inflation rate of 2% and since we are currently trending at a much higher rate, the goal is to move the economy more towards the target.  How is this supposed to help?  The two biggest impacts are:

  • Believe it or not, raising rates could lower imported consumer goods, since the dollar exchange rate may increase.  In other words, the dollar could continue to strengthen with rate increases.

  • It will encourage more savings (higher earnings on the savings) and less borrowing (higher interest rates), slowing down the demand for goods and services, thus cooling off prices (remember the fun economic classes - there is a price point where demand starts to fall).

So why not raise rates more if there are these positive benefits?  The dance steps aren’t that easy.  Rate increases are meant to slow down the economy, raising them too quickly could cause too much slow down and put us into a recession.


Do your friends ask you financial questions? 
Pass those questions on to us at AskRPG@rootedpg.com and we will feature them in our future newsletters under this section.