The headline inflation number is down significantly from the 9.1% high in 2022 and consumers are broadly more optimistic about the economy. And yet, few individuals seem to be feeling much financial relief these days.
Recent research showed that as of June 2023, 61% of Americans say they live paycheck to paycheck with 21% struggling to pay bills. Among those earning $50,000 to $100,000, 65% said they are paycheck to paycheck and 45% of those earning more than $100,000 said that as well.1
Where is inflation headed?
"I think that the underlying dynamics of the economy have shifted substantially over the last 5 to 10 years," says Collin Crownover, PhD, a research analyst with Fidelity's Asset Allocation Research Team. "Inflation was running a little bit below 2% for the better part of the past couple of decades. It could run closer to the 2.5% to 3% range over the next few decades."
That means the rising cost of living is mainly here to stay. That's because the source of inflation right now is coming from demand pressures that are more persistent than the global supply chain problems that helped spark the jump in inflation initially.
"When inflation is a supply issue, prices may come back down; for instance, the price of used cars has been falling as the chip shortage faded," says Crownover. "But today, I would argue it's mostly demand-based inflation that we're facing—wages have been bid up because there's a shortage of labor relative to job openings. Wages are finally starting to catch up to and even surpass inflation."
"Think about the price of service providers like hairstylists or doctors," continues Crownover. "Most of the cost of providing a service is the wages that go to individuals. People don't like to have their wages slashed, particularly after they've received an increase. So in those types of areas, higher costs are probably here to stay."
"What the Federal Reserve would love to see is wage growth cooling a bit with no jobs lost. And so far, what they've done hasn't caused large-scale layoffs. And we have seen inflation come down. So that is a wonderful scenario," says Crownover.
"I think what troubles some of us who look at inflation for a living is that a lot of those declines don't necessarily look like they can be sustained. For instance, a big component of declining inflation, or what we would call disinflation, was the fact that fuel prices went down substantially as oil came back on the market after an initial spike following the Russian invasion of Ukraine. But that's starting to reverse now, just as one example," Crownover explains.
Between volatile commodity prices and sticky wage increases, continuing progress to the Fed's inflation goal may get more difficult.
Read the Asset Allocation Research Team's latest take on the economy: Watching out for a return to volatility
What you can do
Focus on what you can control: your spending, saving, income, and investing. Consider taking these 5 steps.
- Trim spending. Start by reviewing records of your spending if you use a debit or credit card. Shop around for the best deals on items you need to buy to make the most of your money. And look for areas where you may be able to pull back. One easy place to start trimming expenses: "People tend to have tons of subscriptions floating around that they don't use all that much. You might have 6 streaming services and watch 2 of them," says Crownover. Read Viewpoints on Fidelity.com: 50/15/5: An easy trick for saving and spending
- Look for ways to boost your income. There may be a side hustle that could bring in some extra money. Read Smart Money on Fidelity.com: 20 side-hustle ideas that could bring in cash
- Make sure your emergency fund is healthy. If you're able to spend less, you may be able to save a little bit more. Fidelity suggests aiming to save enough to cover essential expenses for 3 to 6 months. If that seems like too much, aim for $1,000 or 1 month's worth of essential expenses, whichever is more—and then keep going until you feel secure. Read Viewpoints on Fidelity.com: How much to save for emergencies
- Make the most of your cash. With yields on money market funds, CDs, and bonds higher than they have been in years, it’s a good time to consider putting excess cash to work earning income. Learn about short-term investments: Fixed income, bonds, CDs, and money market funds
- Invest for growth potential. It's important to earn a return on your money at or above the rate of inflation just to keep your purchasing power. To reach long-term goals like retirement, you may need the growth potential of stocks. Though they can seem riskier than relatively safer investments, investing too conservatively can also be risky.
Crownover suggests that this is particularly important for people with decades to invest. "Being too conservative with your investments can be risky over time. The value of conservative investments, like bonds, tends to get eroded by inflation. Having more exposure to what we would call real assets, things like equities, maybe commodities, or property, can help your money keep up with inflation," he says.
Read Viewpoints on Fidelity.com: 3 keys: The foundations of investing
If you're not sure how to invest for your goals, connect with us. We can help you create a plan for any kind of market.