After attempting for several years to coax inflation back up to 2% in the US economy, the Federal Reserve has finally succeeded. The Commerce Department reported last Friday that consumer prices were 2.3% higher in May than they were the year before. Core inflation, which ignores food and energy prices, was up 2% year over year. This is the first time since April 2012 that core inflation has exceeded 2%.
Should you be concerned? Probably not. Inflation is a natural element of a growing economy. While the Fed has been diligently pursuing its 2% target, it has made it very clear that continued inflation increases will be met with direct action. The Fed has already raised interest rates twice this year, and it is looking increasingly likely that the central bank will increase rates two more times before the end of the year, and three times in 2019.
Inflation has been stagnant for years, for a variety of reasons. In the aftermath of the Great Recession, economic demand has languished, a strong dollar has made imported goods less expensive, and the labor market has only recently recovered, which has kept wages down. Other factors include an aging population, rising consumer debt levels, inexpensive imports arriving from low cost economies, and price pressure from online retail competition.
The factors that are now pushing inflation upward include slowly rising wages, growing demand for goods and services, and higher energy prices. The prospect of trade tariffs, which act as a tax on goods and services and increase prices, threaten to drive inflation even higher.
In our planning for clients, Springwater assumes future inflation will average 2.5% per year over the long-term. We assume that health care costs will rise at 6.5% per year. If inflation continues to accelerate, we will adjust our assumptions accordingly.
We wish you and your family a safe and reflective Independence Day.
Content courtesy of The Wall Street Journal
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