The Labor Department announced this week that the price of consumer goods saw its highest increase in almost 13 years. The consumer price index, which tracks the cost of a "basket" of common expenditures like food, housing, and energy, rose 5% from May 2020 to May 2021, exceeding analysts' expectations.
For the time being, investors don't seem fazed: All three major indexes were up as of Thursday afternoon, with the S&P 500 hitting a new record high. Still, in some quarters, there's concern about rising prices. Here's everything you need to know.
As Greg McBride, chief financial analyst at Bankrate, puts it: "Inflation is why the meal you buy today will likely cost more next year, [and] why the medicine you buy, insurance premiums you pay, and [the] cost of shelter all tend to rise over time. Today's dollar will buy less in the future. How much less and how far in the future depends on the rate of inflation."
When prices rise, your dollar doesn't stretch as far. While it may be hard to notice what you shell out for every small purchase, higher costs add up. One example is the steady rise in health-care prices in recent years, to the point where managing a chronic condition like diabetes becomes extremely expensive.
Inflation can also affect how much you earn. Corporations use the inflation rate as a benchmark for compensation, since the CPI gauges the cost of living for the typical consumer. Increases often determine whether, and by how much, companies will increase yearly pay.
Even if inflation helps you bring home more money, it can eat away at what you save. The average interest rate on a traditional savings account — 0.06%, according to Bankrate's June 2021 weekly survey of institutions — is far lower than the current rate of inflation, meaning that the value of any money you save in that account will decrease over time.
The 5% CPI increase from May 2020 to May 2021 is the biggest in over a decade. The previous high was 5.3% in August 2008, just before the start of the financial crisis and Great Recession.
Not all prices are increasing at the same rate, though. While food prices (encompassing groceries and dining out) rose just 0.4% compared to last May, prices for used cars and trucks were up 29.7%. The variation between industries could seem worrying, but it's actually a good thing: It indicates that the tumult may be temporary, due to disruptions in the supply chain caused by Covid.
For example, the food supply has been largely stable during the pandemic, but a Covid-induced delay in the production of microchips has led to a new-car shortage, driving up the price of both new and secondhand rides.
Video by Stephen Parkhurst
The year-over-year increase in prices looks high in part because the economy essentially ground to a halt last spring in response to the pandemic, experts note. In May 2020, millions were working from home, and demand for commuter cars dropped accordingly. By contrast, people in lockdown still needed to eat as much as they do today, which explains why food prices haven't shifted too much.
"Temporary price spikes coming out of a recession are fairly typical, and we're seeing an even more pronounced effect now because of the pandemic's impact on consumer spending, the supply of goods, and the capacity available to provide services," says McBride. "But the real question is whether or not what we're seeing is just temporary or something more sustained."
While central bank officials aren't worried, they're definitely keeping an eye on inflation. If major price increases continue, more drastic governmental action could be necessary.
The latest CPI report "does nothing to disavow the notion that what we're seeing could well be temporary," McBride says. But the debate is "going to go on for months before we have a definitive answer. Investors are prudent to keep their eyes and minds open."
Video by Mariam Abdallah
News about rising inflation can be a good motivator to invest money for the future, since you won't get much return on your savings.
Be sure to diversify your portfolio with a mix of stocks, bonds, and other assets to protect and grow your wealth. Opening a high-yield savings account, or diverting cash to one you already have, can also help your money earn compound interest and outpace inflation.
This article has been updated to reflect when the Labor Department made its announcement.
More from Grow: