Broker Check

Inflation: The Number vs The Feeling


By:  Aaron Anderson, CFP®, CFA, Managing Partner

March 27, 2024

I was fortunate to be able to go down to Florida in January to celebrate my Grandmother’s 95th birthday.

My cousin bought one of those signs that talks about nostalgic things from your birth year as a decoration. In 1929, the first car radio was made by Motorola, the first public phone booths (what are those?) were installed in London, 7-Up was created, and of course, the stock market crashed which led into the Great Depression.

The thing I found most interesting was a list of common goods and their costs. The cost of a first-class stamp was $0.02, a gallon of gas was $0.21, a dozen eggs were $0.61, and the average cost of a new house was only $7300. To help put those wonderful prices into perspective, the average annual income was $1400. Adjusting solely for inflation, that stamp would cost $0.36, gas $3.81, eggs $11.07, and the house $132,478.

I’m sure you’re thinking what I was thinking. We were all complaining when eggs hit $5 a dozen but inflation adjusted, that’s still less than half of where they were in 1929. Stamps are almost double, gas is a little cheaper, and houses are almost triple that inflation adjusted number.

This gives a bit of insight into why inflation at home feels worse than the inflation numbers that economists calculate that are used to guide monetary and fiscal policy. The graph below shows inflation broken down by category from 2000-2022. As it says, price levels have increased by 74% broadly speaking so I’ve added a line to visually approximate that level on the graph.

As you can see, the categories that are at or above average are the things people tend to spend money on regularly: medical care (no wonder why hospital services can bankrupt people!), college, childcare, food, housing. The things that are below average are things we don’t: cars, furniture, clothing, electronics, toys.

I remember getting my first HDTV about 20 years ago. Since Rachelle and I were both working good jobs and didn’t have children, we had a little bit of extra money. So, we went to Circuit City and bought a nice 55” HDTV – it was $1500 despite being on sale and me having a coupon. Now we can walk into Walmart and buy a better one for a few hundred. Unfortunately (or fortunately?) we don’t buy TVs too often so that huge price decrease hasn't done anything for our budget except making it cheaper to replace.

The last quarter – really over the last two years – the market has been at least partially driven by Federal Reserve actions regarding inflation. They raised interest rates to try to get inflation back toward their 2% mandate and it seems to have worked somewhat although supply chain problems from Covid have eased, so that’s helped as well.

Now they have stopped raising rates and have signaled small rate cuts. Despite interest rates being where they are, the economy has proven resilient. This has helped lead to some large market gains to start the year and new highs in the major indices. It’s why we always recommend sticking to your plan: while we never know exactly what the market will do in the future, patience with the volatility has historically been rewarded.

People sometimes hope for deflation – lower prices – like back in the “good, ole days”. Why is the mandate for the Fed 2% inflation?

Deflation is an economy killer. One of the things that keeps the wheels of commerce moving is the expectation of higher prices in the future. If people believed that prices would decrease, they’d be more likely to wait to make discretionary purchases slowing the economy and maybe even pushing it into recession.

So why 2%? It gives the Fed a buffer and time to react before the economy gets into a deflationary environment. They can increase the money supply or lower interest rates in hopes of jump starting the economy to avoid recession.

Rachelle and I were eating at an Asian restaurant recently and ended the meal with the usual fortune cookie.

I kept my fortune since it's a good reminder that inflation is out of our control and all we can do is try to adjust to it. And if you win the lottery with these lucky numbers, I want my share!

 Content in this material is for informational purposes only and not intended to provide specific advice for recommendations for any individual.  All performance referenced is historical and is no guarantee future results.  All indices are unmanaged and may not be invested into directly.

The Standard & Poor's 500 Index is a capitalization weighed index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. 

The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing includes risks, including fluctuating prices and loss of principal.