Is Inflation Slowing Down? What The Latest Data Shows And What It Means For Your Portfolio

Key Takeaways

• Inflation has been on a downward trend since July 2022, but that doesn’t mean we are out of the woods. While the Fed aims to bring inflation down to 2% or less, the latest CPI numbers show inflation at 7.1%.
• The most significant contributor to the most recent CPI numbers is shelter costs. Other contributors to Americans’ budgetary woes include increased food and energy costs.
• The Fed is likely to continue raising rates in 2023. Even if it successfully lowers inflation, these actions could trigger a recession.

According to the latest data released in December 2022, inflation is slowing down. However, that doesn’t mean things have gotten better for consumers.

A decreased rate of inflation does not indicate that inflation is low. In reality, consumers were paying 7.1% more in November 2022 than they were in 2021, and this is before accounting for costs like food or gasoline.

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The Federal Reserve has said that it intends to get inflation down to 2% or less, so we still have a long way to go. Whether or not we see inflation continue its downward trend in 2023, we’re likely in for a rocky ride.

But what does this mean for your portfolio? Can you protect your investments? Here’s what you need to know.

Latest Consumer Price Index numbers

At its peak, inflation reached 9.1% in June of 2022. The latest numbers from November 2022 show inflation at 7.1%, which is 0.1% higher than in January 2022. It still needs improvement, but it’s lower than it was during the summer.

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The Consumer Price Index (CPI) shows us these numbers. Certain expenses are impacting CPI increases more than others. Here are the main contributors.

Shelter Costs

When we look at rental rates over the past couple of years, pricing increased by 23.5% between October 2019 and October 2022. In the time since, the rate of increases on new rental contracts has decreased.

Nevertheless, a slowed rate of rent increases doesn’t necessarily indicate lower costs for renters. This is similar to how inflation is still bad at 7.1% even though it was higher over the summer.

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Shelter costs in the CPI are a lagging indicator. This is because rent contracts usually last for one year. Even if rent costs increase, this is not likely to be represented in CPI until much later once a more significant portion of the market starts incurring those higher costs.

The November numbers include an increase in shelter costs even though new rental contracts are no longer growing at quite as fast of a rate. In fact, shelter was the largest contributing factor to new inflation in the latest report.

Plus, some costs are not included in core inflation CPI numbers but still affect American households and their overall spending behaviors. These additional factors influence the 7.1% number.

Food Prices

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One of the most stressful inflationary trends can be found in the aisles of grocery stores across the country. Food expenses increased 10.6% over the same one-year period. Alarmingly, the cost of cooking at home rose by 12.0%, while the price of dining out increased by 8.5%.

To give you an idea of just how high these numbers are, the USDA’s ‘thrifty’ budget for a family of four revealed a monthly spend of $966.60 on groceries alone.

We can expect further increases in numbers as new reports come out. For example, the price of eggs has increased dramatically in recent weeks for various reasons, including a new strain of the avian bird flu that has reduced supply.

Wholesale pricing indicates that consumers may start seeing lower prices on eggs again soon, but just how quickly that reversal will materialize is unknown.

Energy Prices

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Energy prices experienced a month-over-month decrease in November 2022. The decline was just 1.6%.

Once again, the numbers don’t look great when you zoom out to year-over-year numbers. Energy prices went up 13.1% over this period.

Factors impacting energy prices include Russia’s invasion of Ukraine and problems with domestic supply, including the Keystone Pipeline oil spill in Kansas. There are also questions about how China’s reversal of zero-COVID policies will impact global supply and demand.

Will Inflation Keep Going Down in 2023?

The Fed has indicated that it will continue to raise interest rates throughout 2023 or until inflation is under control. The irony is that when interest rates go higher, mortgages become less affordable, which puts more demand on the rental market. This is one of the highest contributing factors to inflated CPI.

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However, the increase in multi-unit construction over the past few years could ease these consequences by creating more supply to meet demand in the rental market.

There is also a chance that, if the Fed is successful, there will be consequences for ridding ourselves of inflation. One outcome is a recession, resulting in companies laying off workers en masse or showing more reluctance to pay them higher wages.

Without a crystal ball, we cannot predict if inflation will continue to decrease in 2023. We can expect that the Fed will continue using monetary policy as its primary tool in combating it.

Bottom Line

Inflation can hurt the economy in different ways. That said, periods of inflation or potential recession should be included in your long-term investment strategy. These are normal parts of the economic cycle, even if the circumstances that got us here were anything but ordinary.

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To hedge against the negative impacts of inflation, you can look at specialized investment tools, like the Inflation Kit from Q.ai. You can also activate Q.ai’s Portfolio Protection, which protects your gains and hedges your losses regardless of which Investment Kit you’re using.

Download Q.ai today for access to AI-powered investment strategies.