Inflation Gnaws at America’s Wealth

Commentary

This week’s release of September’s Consumer Price Index (CPI), a barometer of U.S. inflation, confirmed that inflation persists across the economy. Both CPI and Core CPI (which excludes food and energy prices), advanced by three percent on an annual basis. This was the highest CPI increase since January. While CPI bottomed at 2.3 percent in April, at no point has Core CPI moved much below three percent since 2022, and indications are that inflation will continue to creep up through the remainder of the year. 

Inflation remains materially above the Federal Reserve’s target annual rate of two percent. This difference matters more than would appear. After five years, three percent inflation produces prices over fifty percent higher than would result from two percent inflation, due to the power of compounding. 

Energy prices are once again fueling inflation. Gasoline prices, which had been falling, rose at an annual 4.1 percent in September, marking the largest contribution to CPI’s rise, while energy services (electricity and utility gas) costs rose 6.4 percent. Rising energy prices are particularly concerning with the approach of winter weather across much of the country.

Rising prices on imported goods appear to reflect the impact of import tariffs put in place in recent months. Prices for coffee and bananas (both imported items) are up 18.9 and 6.9 percent, respectively, from a year ago. But even domestically-sourced food prices continue to increase at double digits, with beef prices up 14.7 percent year over year. Consumers are staying home rather than going out to eat, but grocery CEOs report that shoppers continue to trade down in quality, buying less and less frequently. 

Labor costs are also rising. Auto repair costs rose 11.5 percent, in-home care for invalids and the elderly rose 11.6 percent, and gardening and lawn care services rose 13.9 percent. Personal services such as laundry, haircuts, and day care are each up around five percent.

Acknowledging inflation, the Social Security Administration is raising retiree benefit payouts by 2.8 percent, or $56 per month, for 2026. But an increase in retirees’ required contributions to Medicare premiums will take back 38 percent (or $21.50) of the nominal increase, leaving retirees with less to spend. While Social Security benefits have risen a total of 25.2 percent since 2021, it still isn’t enough to keep up with the rise in the cost of living that most Americans experience on a daily basis.

The Trump administration is caught between persistent inflation and a soft labor market. Concern over the economy has led to several reductions in the Fed Funds rate, the benchmark lending rate for the economy. The Federal Reserve’s Open Market Committee will likely cut interest rates further at its meeting later this month, in an attempt to stimulate the economy. Whether such efforts will succeed, lower interest rates will almost certainly fuel continued price inflation, and perpetuate what appears to be a bubble in stock market prices and other financial assets now trading at all-time highs.

Inflation is a hidden tax. Like termites in a house, inflation slowly but surely gnaws away at Americans’ wealth. Retirees and those on fixed incomes are most affected, but no one is left untouched. The value of savings and incomes are both eroded. Purchasing power is diminished.

Despite the negative impact on American citizens, the U.S. government has a strong incentive to allow inflation to persist. As the nation’s largest debtor, with $38 trillion of outstanding debt, lower interest rates reduce the costs of government borrowing, and inflation reduces the effective cost of its liabilities, to the detriment of investors, savers, taxpayers, and American families generally.

Until a real effort is made to close the Federal deficit, which runs at nearly $2 trillion per year, and to reduce the mountain of national debt (on which interest costs run over $1 trillion a year), Americans will continue to suffer the loss of purchasing power and wealth. Productivity growth will help, and many of the policy moves of the administration are designed to get the American economy moving again. 

In the meantime, Americans can take steps to protect themselves from the pernicious effects of inflation. Many Americans are turning to backyard gardens or local co-op farms to grow their own food, whether fruits and vegetables or even backyard poultry for eggs and meat. Families are increasingly buying non-perishable supplies in bulk to get ahead of future price rises. Others are making hard choices to reduce non-essential spending.

The savings can be placed in financial instruments that seek to keep up with inflation. Investments in fixed assets, including homes, land and other real estate, provide a hedge against inflation, as do investments in the stocks of commodity or resource companies. Gold and other precious metals have traditionally been used as an inflation hedge, and recently Bitcoin and other cryptocurrencies have emerged as a digital inflation protection tools for many investors. There is hope. Lower benchmark interest rates will result in lower mortgage rates, perhaps making homes more affordable. In any case, is not too late to take practical actions to protect yourself from an inflationary environment that is likely to continue for years to come. 

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.