about 2 months ago • 2 mins
US prices rose at a hotter-than-expected 3.4% in December – considerably warmer than November’s 3.1% pace. But let’s ignore the short-term inflation data for once, and concentrate on the bigger picture: though the consumer price index (CPI) has indeed calmed down in the past 12 months (it was 6.5% this time last year), for Joe and Jane Average, prices are still way up – a far cry from their pre-pandemic wallet-friendlier days.
See, inflation’s been slowing down, but, that doesn’t mean prices have all been falling. They’re mostly just rising at a slower pace. And because they’ve been on an upward climb for a while, they’re plateauing at an altitude that’s much steeper than a few years back.
For consumers, this matters. Sure, they’ve probably had some pay raises – the job market’s been remarkably strong, after all – but most of those won’t have kept pace with price increases. The result is that most folks are feeling the financial squeeze, especially those on the lower rungs of the income ladder. Now, don't get it twisted: wallets haven't snapped shut. Thanks to some nifty pandemic savings, that resilient labor market, and a little tap-tap of the credit card, spending's still going strong. But in terms of mood, it's not exactly party vibes: there's a cloud of worry hanging over consumers.
Looking ahead, we're straddling a fine line with two very different futures. Scenario one: the economy hits a rough patch, jobs start to vanish, savings dry up, house and stock values dip, and consumers slam their wallets shut. It’s a recipe for a bigger-than-expected slowdown. Scenario two: wages start outpacing inflation, people feel their wallets become heavier, consumers adjust to the new price tags, and voilà – sentiment gets a sunny makeover, giving the economy a rosy boost.
The longer inflation remains high – or worse, the longer it continues to climb – the more likely that first scenario becomes. In any case, be prepared for the unexpected. Wall Street’s consensus is “cautiously optimistic” about this year, but things could flip faster than you can say “economic forecast”. So, don’t bet the farm on a single scenario: in the world of finance, surprises are often just around the corner, whether good or bad.
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