Taking a closer look at the Consumer Price Index (CPI) and the intricate dynamics of inflation that have marked recent months is imperative. December has once again shown a rise in inflation, making it the third consecutive month of increase. However, we are not returning to the 8.0% inflation rate that we saw in 2022.
While overall inflation has risen during the past few months, the energy prices component has declined. Energy prices are down 0.5% from the prior year. However, the respite from rising energy prices is coming to an end, and prices are likely to be above the year-ago level within the coming months.
Food prices are up 2.5% from the prior year and the pace of rise is accelerating. While this increase affects every household, as food is a fundamental necessity, the impact on consumers will not be as extreme as it was in 2022. In 2022, food inflation peaked at 11.4%, putting a significant squeeze on consumers. Expect consumers to be mindful of the increasing cost of food, but this will be less of a squeeze on after-tax income and a lessened impact on wage rise than we saw three years ago.
The CPI does not measure home prices per se. They look at rents and “rental equivalency” for homeowners. Housing consumer prices have risen 4.1%, but the rate of rise is easing. Housing is a significant cost for consumers, and fluctuations in shelter prices can have widespread implications. With the rate of housing inflation at half of what it was at the January 2023 peak, expect lessened wage inflation for the near term.
The bond market is often seen as a harbinger of future economic conditions, and current signals suggest that further inflation is anticipated in 2025 and beyond. The bond market’s anticipation of higher inflation underscores the need for proactive measures to manage and mitigate potential inflation impacts on your business.
While energy prices have been providing some relief, overall inflation will increase as we move through the second half of the year. Changes to tariffs pose a risk to the inflation outlook and the outlook will be reassessed after any new tariffs are enacted. The overall CPI provides a benchmark for the macroeconomy; however, changes in tariffs will more likely result in pockets of inflation before they move the overall CPI in a noteworthy way. Business leaders need to be vigilant and proactive in addressing these trends. Ensure you are benchmarking your costs to the appropriate measure so that you do not underassess and lose margin during the upcoming year.