Today’s entry: Brian, I really enjoyed hearing your report on the strength of the dollar creating value when traveling abroad. Unexpected factoids like those are one of the reasons I enjoy listening to you. In that same vein, with inflation having peaked, where (what products/services) will it remain high longest? And aside from energy, where do you expect it to remain high longest?
Bottom Line: Well, thanks – my longtime content goal has been to provide information that’s helpful, useful and repeatable and I’m glad to hear that remains the case. Today’s note is in response to one of my takeaways last Thursday in which I brought you this... Want to fight inflation? Take a European vacation. Ok, well there’s nothing about European vacations and saving money that inherently goes hand in hand. But the one thing that’s risen faster than the rate of inflation, is the value of the US Dollar in comparison to the Euro, and especially the British Pound. The Pound Sterling has fallen to $1.14 against the Dollar – the last time the two currencies were this close was in 1985. While inflation has risen by 8.5% year-over-year, the US Dollar has risen in value against the Euro by 17% over the past year and a solid 20% against the Pound. So, if you have the dough to go, it’s a great time to do so, you can fight inflation by taking advantage of it overseas. Whether it’s investments or travel, I’ve always been value minded and love finding good opportunities and when found, have always enjoyed sharing them with you. As for your inflation specific question...
You’re familiar with the old saying the higher they climb, the further they fall. There’s a lot of wisdom to it and, in general, it applies to inflation. While there’s a certain amount of speculation about future inflation in specific categories based upon a whole host of uncertainties a la, government spending, recession risk, consumer demand, geopolitical events, etc., what we can discern is that the categories which saw the largest price hikes due to inflation, are going to be those most likely to see the most rapid declines as well. That’s often because they’re especially sensitive to the biggest driver of our 41-year high inflation, which you noted – energy. Here are all of the categories which have experienced above average inflation rates most recently:
- Gas: (44%)
- Energy: (33%)
- Electricity: (15%)
- Food at home: (14%)
- Vehicles (10%)
Below:
- Food away from home (8%)
- Housing: (6%)
- Services: (6%)
- Apparel: (5%)
- Medical care: (5%)
- Education: (1%)
So, there’s your likely answer. As inflation comes down, you’re likely to see the quickest impact with all things energy, from the gas you put in your car – which you’ve already experienced – to your monthly power bill, which we’re seeing with FPL’s average rate increase totaling about 18% this year, but a requested rate increase of about 8% for next year. Also, you can expect your grocery bill to come down fairly quickly as inflation comes down – in addition to finding better prices on cars. Conversely, don’t expect your favorite eateries to be quick to revise the prices on their menus. One of the takeaways from this analysis is how much of the higher cost of food restaurants have eaten (no pun intended). The relative value proposition when eating out is about the best it's been. Ditto housing, services, clothes, healthcare and education. Those costs have all risen at rates well below the pace of inflation and thus inflation will need to fall much further to begin to see meaningful impacts with any of them. And that’s potentially a word to the wise for those looking to attempt to time a purchase of say a home for example.
Many had hoped the slowing down of housing via high prices and the highest mortgage rates in many years would lead to lower prices. It hasn’t, instead the rate of increase in price growth has slowed down. And that’s another important point to remember. What we’re likely talking about going forward, unless there’s a severe recession, is a declining rate of increase in prices as opposed to outright cheaper prices - save energy costs. This is what’s behind yesterday’s stubbornly high inflation rate of inflation, despite energy prices having dropped somewhat meaningfully from June’s peak. Core inflation, which excludes food and energy, remains exceedingly high. There will be opportunities for better value going forward, but they will probably be limited unless the bottom falls out economically.
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