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Is inflation slowing?
Posted on May 13, 2022

The purpose of this post is to provide information on recent trends in inflation. We’ve all been hit with inflation: it hurts our spending power; both stocks and bonds react negatively to increasing inflation. The last time it was this high was about 40 years ago. I have no idea of when it will come down closer the Federal Reserve’s target of 2% per year. I suggest that we’ll see lower annual rates of change at least for the next two months. I’d guess we nest eggers – especially those who recalculate at the end of November like I do – will be seeing ~6% adjustments for inflation in our gross Social Security benefits and our Safe Spending Amount for 2023 (SSA; see Chapter 2, Nest Egg Care). That will give us the ~same spending power in 2023 as in 2022.

 

== Recent history ==

 

I plot the monthly change in inflation for the past 3 1/3rd years. The April increase in inflation was .56%. That’s the lowest monthly change this year; it’s less than half the 1.33% change in March. April is the first month in 2022 that the change has been less than the change for the corresponding month in 2021.

 

Inflation in 2021 exceeded inflation in 2020 at the first of the year and at the end of the year. Inflation in 2022 has exceeded inflation in 2021 for the first three months of the year, but the increase in April 2022 was lower than the increase in April 2021.

 

I plot the 12-month change in inflation for each month for the last 2 1/3rd years. Inflation over the last 12 months was 8.26%. The 12-month rate has steadily increased for ~20 months. (There was a slight decline for 12-month the period ending August 2021.)

 

The 12-month inflation rate in April 2022 (8.26%) was less than the rate ending March 2022. April marks the first decline in the 12-month rate in 18 months.

 

== The future ==

 

You can see from the first graph that for the next two months we’ll be comparing the monthly change in inflation to the highest two-month change in 2021: 1.74% for those two months from the .80% increase in May and .93% increase in June. Assuming the monthly changes for May and June will be less than in 2021, the news will be that the 12-month rate is falling.

 

Then we’ll be comparing monthly changes to the lowest three-month period in 2021: July, August and September. Inflation averaged 0.3% per month, half of the rate this past month. The 12-month inflation rate may climb in those months.

 

Social Security calculates its Cost-of-Living Adjustment (COLA) in October based on the average change in inflation for the three months July, August and September. It uses a different measure of inflation (CPI-W) than is widely reported (CPI-U). CPI-W increased 5.9% for 2022, and that was a greater increase than would have been calculated using CPI-U.

 

Assuming no big turnaround in current market performance, our annual Safe Spending Amount for 2023 will only increase for inflation. We won’t see a real increase, unlike the ~10% real increases all nest eggers averaged over the last two years.

 

Refer to blog post of December 3, 2021 for detail.

 

 

Conclusion: We’ve all been hit with inflation: it hurts our spending power; both stocks and bonds react negatively to increasing inflation; that’s a double-whammy. The last time inflation was this high was about 40 years ago. I have no idea of when it will come down closer to the Federal Reserve’s target of 2% per year. We clearly have a way to go. I suspect we will see 12-month rates decline for the next two months; it will be tougher sledding for the three months after that. I’d guess we nest eggers – those who recalculate at the end of November like I do – will see ~6% adjustments for inflation in our gross Social Security benefits and our Safe Spending Amount for 2023.

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