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There’s only one type of inflation left

December 12, 2023

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If you’re still worried about inflation, it’s probably safe to start relaxing.

If you’re still worried about inflation, it’s probably safe to start relaxing.

The biggest economic problem of the last two years has been steadily improving, with the inflation rate dropping from a peak of 8.9% in June 2022 to just 3.1% now. In some important categories, there’s barely any inflation to speak of.

Since the start of 2021, Yahoo Finance has tracked month-by-month inflation in 28 categories that cover most things people spend their money on. At the peak in 2022, every category except one — electronics — showed positive inflation, and the inflation rate was in double digits in eight categories. Earnings were growing by 5.4%, but inflation was higher than that in 16 out of 28 categories, including the most important ones: rent, food, transportation, and energy.

It’s a much better picture now. There’s deflation, or falling prices, in 10 categories. Food inflation has dropped to just 1.7%. The inflation rate for all goods combined, which hit 13.2% last year, is 0. Gasoline, unofficial arbiter of the national mood, is 9% cheaper than a year ago.

There’s just one problem left: rent.

On our monthly tracker, below, there are only four categories where prices are still rising by more than incomes. Rent is at the top, with a 6.9% increase year over year. Housing, which includes rent and other factors, is up 5.2%. The other two categories up by more than earnings are personal care, which is a small part of the typical budget, and restaurant meals, which are a treat most people can do without if they must.

Inflated rents reflect the same problems many homebuyers are intensely aware of. Real estate costs in many areas surged during the COVID pandemic and never came back down. Rising interest rates, meanwhile, have made mortgages more expensive. There’s not enough new housing, so supply is tight. Landlords face many of the same cost pressures homebuyers do, and pass as much of the cost on to tenants as they can.

Good news is coming, though. Rent is an unusual product to measure, because most people sign leases for a year or more. So the price many people pay was set in the past, and doesn’t reflect current conditions. Many renters will get a break the next time they sign a lease, however.

The Apartment List rental index, which better measures the current market, dropped 0.9% in the latest monthly reading and has fallen for four months in a row. It’s likely to keep declining, at least for a couple more months. That will eventually show up in the official inflation data, bringing the last of the big expenditure categories back to a normal range.

Inflation still feels oppressive to some people, for a couple of reasons. In most categories, price hikes of the last two years haven’t gone away. We’re just seeing smaller price hikes now. Food prices during the last year are up just 1.7%, but they’ve grown by 25% since 2019, which is about 5 percentage points more than incomes have risen. So food costs eat a little more of the family budget than they used to.

We’ve also exited a period of extraordinarily low interest rates, engineered by the Federal Reserve, that dates all the way to 2008. That’s when the Fed began “quantitative easing,” designed to bring long-term interest rates down, in addition to the more familiar Fed move of lowering short-term rates during a downturn. The Fed began QE to combat the financial crash during the Great Recession, and never changed course until inflation began to heat up in 2021.

Long-term rates, which affect mortgages, car loans, and other types of consumer financing, are now closer to historical averages, where they’ll probably stay. Now that it has pulled the bandage off, the Fed is unlikely to return to QE unless there’s a crisis.

Consumers will get used to all this, but it may take longer for psychology to adapt than for inflation to come down. Inflation began rising by more than incomes in 2021, which meant the typical consumer was falling behind. That only reversed this past summer, when income growth finally surpassed inflation. So people are getting ahead again; they just have a lot of ground to recover.

As long as that continues, inflation will fade, along with the psychological scarring from two years of devastating price hikes.

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