Last year, rising prices touched nearly every sector of the economy as the U.S. faced high inflation.
The increase in overall prices — measured by the consumer price index — was 9.1% for the 12 months ending June 2022. Although inflation is lower now — the CPI increased by 3% over the 12 months through June 2023 — the impact on consumers can vary based on their personal expenses.
Use this inflation calculator to see how prices are changing (2023 data is through April 30):
What Is Inflation?
is the loss of purchasing power over time as prices rise. It is often expressed as a percentage and generally refers to a trend marked by rising prices across sectors, affecting common household expenses like food and energy.
Those who rent and spend large percentages of their income on basic necessities are often the first to feel the effects of inflation on their budgets. Rising costs associated with inflation can be obvious, whether at the pump or the grocery store, or they can take the form of shadow inflation, in which the quantity or quality of goods declines even as prices remain relatively stable.
In addition to low-income individuals, those who do not own stock are at particular risk.
“In a moderately inflationary environment, it’s even more important to get your money working for you in the stock market,” says Alice Finn, founder of PowerHouse Assets and author of “Smart Women Love Money.”
“Since the beginning of 2023, the S&P 500 is up about 20%, if you include dividends. That’s an amazing return and it beats inflation. If you put your money in most bank accounts right now you are still not earning much, so you are losing money against inflation,” she says.
The stock market can be volatile on a short-term basis, however, and she does not recommend investing money in the market that you need in the next three years. But you may be able to find better rates than your bank is offering if you shop around for a high-yield savings account or money market account.
“Make sure any savings you have that you don’t want to invest in the stock market are in a high-yield account, earning over 4%,” Finn says.
[Tips to Make Ends Meet During High Inflation]
Historical Inflation Rates
Economists often rely on the CPI, which measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, to track historic rates of inflation.
Since the CPI’s creation, the annual percentage change in the index was a historic high of 17.8% in 1917. More recently, during a period of particularly high inflation in the 1970s and 1980s, inflation hit its annual high of 13.5% in 1980.
When evaluating inflation rates, keep in mind CPI measurements of inflation tend to slightly lag immediate economic conditions.
“The CPI index is designed to try to capture the cost of living for households. It’s never going to be a perfect measure,” says Andrew Hunter, deputy chief economist at Capital Economics. “Housing is a very big part of the CPI index, a big driver of the inflation figures. It tends to, as far as the official BLS measure, be very slow moving.”
“After rising very sharply over the past couple of years, housing inflation is now slowing according to the CPI, but this is definitely an area where that won’t necessarily reflect what households are actually experiencing,” Hunter says.
[READ: What Causes Inflation?]
“For example, if you have a fixed-rate mortgage and haven’t moved recently, your housing costs won’t have changed over the past three years,” he adds.
Another way to understand historical inflation trends is through the personal consumption expenditures price index, or PCE price index, which measures the change in prices for all consumption items, not just those paid out of pocket by consumers. The PCE can better account for substitutions between similar items when one of them becomes more expensive.
Inflation Today
The annual rate of inflation as of June, according to the CPI, is 3% over last year. According to the PCE, the rate of inflation is 3.8% over the last year as of May 2023.
“Broadly measured, inflation is down considerably compared to what we were seeing last year,” says Andy Baxley, senior financial planner at The Planning Center in Chicago.
“We’re finally seeing positive real returns on certain high-yield savings and money market accounts, which is a welcome change. With the worst of inflation hopefully in the rearview (for now), we can all breathe a sigh of relief. That said, we shouldn’t expect prices on goods and services to return to pre-COVID levels. We are seeing price declines in certain categories compared to last year, but in general, we should expect a cooling off of the rate of inflation, not widespread deflation. Consumers waiting for prices to come down before making a big purchase may be disappointed,” he adds.
[Read: How to Handle Retirement With Rising Inflation]
Inflation by Sector
Economists highlight food, housing and energy as the three sectors that often experience the highest rates of inflation and have the greatest effect on the most consumers.
Food
In the last 12 months, the average price of food at home rose 4.7%, according to CPI data through June 2023.
Housing
Rent in the U.S. cost about $2,048 per month in May 2023, according to the Zillow Observed Rent Index, which calculates the mean of listed rents that fall into the 40th to 60th percentile range for all homes and apartments in a given region. This is up from $1,609 in the U.S. in March 2020.
“Renters are particularly vulnerable to inflation,” says Gary Zimmerman, founder and CEO of Max, a cash management solution that helps maximize yield and FDIC insurance coverage.
“By contrast, those who own homes will likely keep pace with inflation and will actually benefit from having locked-in low mortgage rates. Those with large mortgages stand to gain the most, as inflation may increase the nominal price of their home while at the same time reducing the real value of their mortgage debt. This is one reason why the housing market remains so tight despite higher interest rates: No one wants to give up their low-cost mortgage,” he adds.
Energy
The average price of gas decreased by 26.5% over the last 12 months ending June 2023, according to the CPI, after rising 43.6% for the 12 months ending April 2022.
“We’ve just lived through several years of elevated inflation,” Zimmerman says.
Zimmerman also says that early on in the cycle, labor shortages led to supply shocks, which drove up the price of household appliances, lumber and automobiles. As the economy emerged from lockdown, people began to increase personal consumption, once again going out to restaurants, taking vacations and hosting large social events like weddings that had been delayed by the pandemic.
This increase in demand drove up the prices of flights, hotel rooms and consumer discretionary goods, Zimmerman says. And this shift in the underlying cause of inflation led the Federal Reserve to embark upon an aggressive monetary policy designed to help cool demand.
“We’re now starting to see the impact of the Fed’s actions, but we expect prices will remain high because so much new money was printed during the pandemic that it has diluted the value of our existing dollars, leading to permanently higher nominal prices,” he says.
Update 08/08/23: This story was published at an earlier date and has been updated with new information.
