Have you seen a lot of inflation-related headlines in the financial and mainstream media recently touting how inflation is falling?
I know I have, and the headlines all read a little something like this:
- “Inflation is Falling!”
- “Inflation Declines More Than 50% from July 2022 Highs”
- “Inflation Hits Lowest Level since March 2021”
Now, I must admit that all the above headlines are actually accurate. Moreover, it’s also absolutely true that inflation is declining, and broadly speaking, that’s a good thing.
But what exactly does a decline in inflation (or “disinflation,” as I and others refer to it) mean? Here’s the easiest way to understand it, and in doing so, we can understand the real problem with inflation.
One note here before we go on is that the following analysis comes to you from my daily market briefing, “Eagle Eye Opener,” which, if you don’t subscribe to it, what are you waiting for?
The Eagle Eye Opener is a collaboration between myself and my “secret market insider,” a man who supplies institutional level analysis for clients paying thousands of dollars per year for his insights. But in the Eagle Eye Opener, you get a condensed version of what really matters in the market, that day, for a fraction of that cost.
Ok, now on to the real problem with inflation, which to explain, requires nothing more than a bag of Skittles.
I live in Southern California horse territory, and though it’s largely rural, there are still plenty of stores close by. One that I frequent is the Rite Aid near my ranch. Now, before the pandemic, if I bought a pack of Skittles, it cost me about $0.75. Today, it costs me about $1.50. And based on the current inflation rate, next year, that bag of Skittles will cost about $1.55.
So, while it’s good that those Skittles will only be about 2-3% above last year’s prices, the cost is still more than 100% above the price of the same pack of Skittles in 2020!
Bottom line, the decline in inflation (disinflation) that’s being celebrated in Washington, the mainstream media and the aforementioned financial media headlines is good, but it does nothing to reverse the massive price increases of the past several years. They, sadly, are here to stay, and the best the Federal Reserve can do is keep any further price increases small.
So, it’s important not to confuse disinflation with the idea that the price increases of the past several years will reverse, because they will not. I think the best hope for inflation is that it levels off, so my Skittles stay around $1.50. But $1.50 is still a lot for a pack of Skittles!
The longer people have to pay that price, the more it (and other things) chip away at excess savings and excess spending, potentially resulting in a spending slowdown in the not-too-distant future. Perhaps people have so much money exiting the pandemic that the price gains can be absorbed over the long term, and that’s clearly what the bulls think today. But anecdotal observations are telling me that may not be the case.
Bottom line, disinflation is a positive; however, it’s important not to confuse the decline in inflation with the idea that prices are about to drop and give us all some relief. They are not — and the best we can hope for is that they simply stop going up very much.
I don’t want a loudmouth for a president
I don’t cheer for the red or blue team
All I want is a neighbor I can learn something from
Be good to them and they be good to me…
— Seth Avett, “Song For A Neighbor”
Seth Avett of the Americana band The Avett Brothers is one of the best song writers of his genre, and in “Song For A Neighbor” he demonstrates just that. A catchy melody and biting lyrics like the ones above pack a powerful warning punch against the prevailing negative trends of tribalism and cult-like political worship. They also promote something I hope we can all get behind, and that is the importance of bonding with those closest to you.
Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.
P.S. Come join me and my Eagle colleagues on an incredible cruise! We set sail on Dec. 4 for 16 days, embarking on a memorable journey that combines fascinating history, vibrant culture and picturesque scenery. Enjoy seminars on the days we are cruising from one destination to another, as well as dinners with members of the Eagle team. Just some of the places we’ll visit are Mexico, Belize, Panama, Ecuador and more! Click here now for all the details.
In the name of the best within us,