Industry Study
2024 Inflation Study
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Summary:
Inflation is up 3.5% annualized, and real average earnings increased by 0.2% from February to March 2024. Inflation is dropping now, but the average U.S. household spent an extra $2,724 last year because of inflation. This “inflation tax” has hit low-income households the hardest.
The latest inflation report shows that inflation rose by 0.2% on a seasonally adjusted basis in March. However, this is still much lower than the numbers that were coming out in 2022 for example, where numbers were as high as 9.1%. This is mainly due to a stabilization in several indexes, such as gas and food. Furthermore, supply chain logistics that were affected by the COVID pandemic, and gas price spikes as a result of Russia’s invasion of Ukraine, have since stabilized.
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Inflation and the Fed
The Federal Reserve has raised the Federal Funds Rate 11 times since March 2022 when it was at 0.25%.
This strategy seems to have enjoyed some success, but the overall inflation picture remains unclear, with different factors moving in various directions. The slowdown in inflation brings relief for consumers, but the path back to pre-pandemic levels of 2% inflation is still uncertain.
Inflation grew in March but there is a silver lining
The latest inflation data reveals a nuanced picture. While the Consumer Price Index rose by 3.5% through March, this figure can be misleading. The rapid inflation seen in previous years impacted the current readings. The “core” inflation metric, which omits fluctuating prices of food and fuel, showed a moderate increase, rising by 4.51% over the past year. This suggests a stabilizing trend, further highlighted by factors such as the slowing rise of rent prices.Several economic indicators, such as decreasing airfares and hotel costs, and cheaper used cars, hint at a tempering of price hikes. However, the Federal Reserve is carefully monitoring these figures to determine their next move on interest rates. Current rates, which stand between 5.25% to 5.5%, have made borrowing more expensive, impacting house and car purchases. This strategy aims to control inflation by slowing the economy, with some experts suggesting that we might be nearing the peak of these interest rate hikes.
While the Q1 2024 inflation report offers optimism, it presents several challenges.
Real wage growth turns positive March 2024
March saw the sixth consecutive month of real wage growth. From October to March, the average hourly pay for all workers increased by 1.2%. This was influenced by a 0.4% rise in hourly wages, but there was also a slight increase in the cost of living, as the Consumer Price Index (CPI-U) went up by 0.2%.
Core inflation (aka sticky-price index) dropped to 4.51%
Core/sticky CPI measures the prices of goods and services that change slowly, such as housing, healthcare, and education. Core/sticky CPI remains at 4.51% (year-over-year), which is substantially higher than the 3.5% overall inflation. However, it is a big improvement from the 6.6% peak of February 2023.
Implications of high core/sticky inflation
The contrast between the drop in overall inflation and the persistently high core/sticky CPI has several implications:
- Mixed signals for consumers: The drop in overall inflation may lead consumers to believe that their financial situation is improving, but the higher core/sticky CPI indicates that the cost of essential goods is higher. This can create confusion and make it challenging for consumers to plan their budgets.
- Uneven impact on the economy: The slowdown in overall inflation may benefit some sectors of the economy, but the higher core/sticky CPI suggests that other areas, particularly those related to essential goods and services, are still under pressure from rising prices. This uneven impact can lead to disparities in the economic recovery process.
- Monetary policy challenges: The contrast between overall inflation and core/sticky CPI can create difficulties for the central bank in determining the appropriate monetary policy. If the central bank focuses only on the overall inflation rate, it may overlook the ongoing price pressures in essential goods and services, which can have lasting effects on consumers’ well-being.
The drop in overall inflation, now at 3.5%, is a positive sign for the economy. However, the higher core/sticky CPI does indicate that the strain on consumers due to rising costs of essential goods and services is still very real. This contrast highlights the complexities in managing inflation and the challenges faced by both consumers and policymakers in navigating the current economic landscape.
Housing inflation hits renters and low-income families the hardest
The cost of housing increased by 6.0% in January 2024 (latest data available), according to the Case-Shiller National Home Price Index. This is a huge drop from the peak of 20.8% YoY increases of March 2023. Rental inflation has slowly been dropping for consecutive months with February of 2024 registering a 5.7% increase YOY.
Renters tend to skew toward the lower incomes. According to data from the Federal Reserve about six-in-ten Americans in the lowest income quartile (61%) rented their homes, as did 88% of people with net worths below the 25th percentile. In other words, households with lower incomes are more likely to be renters. The Federal Reserve study found that only 10.5% of people in the top income quartile were renters.
CPI does not correlate to drops in rental on other platforms.
According to the CPI data published by the Bureau of Labor Statistics, renting costs are rising only slightly more than overall inflation (7.639% vs. 3.5% March 2024). The BLS data contradicts other data that we have collected.
To illustrate how the CPI understates rent inflation we compared the inflation rate reported by BLS in March 2024 with the real-world data collected by Realtor, Redfin, and ApartmentList and found that the BLS’s CPI is significantly. The reason for this is obvious when you consider how the CPI collects its data.
Why does CPI understate rent inflation?
The short answer is that the CPI for rent is a lagging indicator that doesn’t reflect current changes in rental prices. As mentioned above, the Bureau of Labor Statistics calculates rent prices using a survey. This survey asks renters “What is the rental charge to your household for this unit, including any extra charges for garage and parking facilities? Do not include direct payments by local, state or federal agencies. What period of time does this cover?”
The issue here is that the BLS is asking what renters currently pay, not what the landlord would charge if new tenants were to move into the house. For this reason, CPI understates rising rents, particularly in times when prices are rising quickly.
Inflation cost the average family $2,724 ($227 a month) last year
On average, this means that each U.S. household had to spend an additional $2,724 this year to buy the same goods and services it purchased last year, according to estimates by Bloomberg Economics. If we compare it to 2022, over a 3 year period that would mean the average cost of inflation on the average family increased by $12,828.
The inflation tax, of course, increases for wealthier consumers because they, well, spend more. However, the poorer consumers feel the cost of inflation much more because it represents a larger percentage of their incomes, and they have less wriggle room to absorb changes in prices.
We looked at the median household income for each quintile (chunks of 20% of the population), and this is what inflation costs each group as a percentage of their median income.
Inflation gave low-income families a 15% pay cut
Households with incomes in the bottom 20% got a 15.6% wage cut because of inflation. It’s worse than that. Lower-income families spend a bigger chunk of their income on basic necessities, such as food, housing, and gas, which are often significant contributors to high inflation.
Medium and high-income households may have to cut back on eating out or vacations to offset the cost of inflation, but low-income families often have to cut back on basics, such as food and medical care.
Some households were indeed able to build up their savings during the pandemic, and many workers are seeing increases in their wages, which does help soften the blow of inflation. However, this is not the reality for most lower-income households who couldn’t work remotely and lost their jobs during the lockdowns.
In any case, inflation will cause savings to run out faster, which will push more workers into the labor force and eventually stunt wage growth.
Real disposable increases to $50.346K
Inflation did erase income gains from 2021, but there has been a rebounding in the last few years.
Disposable income is after-tax income. It’s the amount that U.S. residents have left to spend or save after they pay taxes. The formula is simple: personal income minus personal current taxes.
Real disposable income is still well below the peaks caused by the COVID stimulus packages but is still historically high.
Key takeaways
- In March 2024, inflation rose by 3.5% on a seasonally adjusted basis, a significant decrease from the 9.1% seen in June 2022, primarily due to declining gas prices. However, core inflation remains at 4.51%.
- The Federal Reserve has increased the Federal Funds Rate 11 times since March 2022, taking it from 0.25%. The overall impact of this strategy on inflation is still being evaluated.
- March’s Consumer Price Index displayed a 3.5% rise. However, due to rapid inflation in June of the previous year, these figures may appear inflated. The core inflation metric reveals a 4.51% increase over the past year, suggesting a potential trend towards stabilization.
- March marked the sixth consecutive month of real wage growth with average hourly pay for all workers increasing by 0.2%.
- Core/sticky CPI, which measures prices of goods and services that change slowly, stands at 4.51% year-over-year. This rate highlights that while overall inflation has dropped, the cost of essential goods remains high.
- Recent data indicates a drop in housing costs, but rental inflation remains a concern, particularly affecting renters and low-income families.
- CPI can significantly differentiate from market pricing in terms of housing.
- The average family had to spend an additional $2,724 due to inflation last year. The effects of this inflation tax were more pronounced on low-income families, essentially leading to a 15% pay cut for them.
- Real disposable income, even after accounting for inflation, has seen some recovery in recent months, currently standing at $50.346K.
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Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.
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