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Inflation is Going Down

Inflation is Going Down

February 28, 2024

Today we’re going to look at a little bit of economic history and a little bit of music history. On the musical side, in August 1985, Bruce Springsteen released the sixth single from his 1984 album Born In The U.S.A., I’m Goin’ Down. The song ultimately hit #9 on the Billboard Hot 100 Singles chart, one of a record-tying seven top 10 singles from the album.

Source: Discogs

The lyrics show the narrator's girlfriend responding to his multiple attempts at intimacy and romance with nothing more than boredom, fights, and sighs. This leads to the frustration that Bruce shares after each unsuccessful attempt:

We get dressed up and we go out, baby, for the night
We come home early burning, burning, burning in some fire fight
I'm sick and tired of you setting me up yeah
Setting me up just to knock-a knock-a knock-a me down

Down, down, down, down
I'm goin down, down, down, down

I'm goin down, down, down, down
I'm goin down, down, down, down, hey now

For those of you who would like a flashback to nearly 40 years ago, when Bruce and the E Street Band were performing this song on the Born In The U.S.A. tour, you can click the YouTube link below.

I'm Goin' Down - Bruce Springsteen (22-08-1985 Giants Stadium, East Rutherford, New Jersey)

In a similar way, inflation has been coming down for more than a year and a half. After peeking in June 2022 at 9.1%, the Consumer Price Index, CPI, the January read on inflation, showed the year-over-year rate falling from 3.4% to 3.1%. This was disappointing to economists and market strategists, who expected the number to come in under 3%. As a result, both the stock market and bond market went down.

The Bureau of Labor Statistics has been compiling CPI data since 1913. Its predecessor, Warren and Pearson’s Price Index gives us additional inflation data going back to 1872. The combined data set is available on Noble Laureate and Yale Professor Robert Schiller‘s website and can be seen in the chart below.

You will notice that from the beginning of the chart through the post-World War II time period, we regularly oscillated between periods of high inflation, sometimes reaching 15% or more, and significant deflation, which was nearly as strong in the opposite direction.

You will also see that after the period of hyperinflation in the late 70s and early 80s was conquered, inflation generally remained below 5%. That is until our recent post-COVID surge, which was caused by significant fiscal and monetary stimulus being poured on an economy that was already rebounding from its pandemic, shut down.

So, what does 150 years of inflation do to the purchasing price of the dollar? Please look carefully at our final graph of the day. It shows that the value of the dollar has also gone down dramatically.

I'm goin down, down, down, down

I'm goin down, down, down, down
I'm goin down, down, down, down, hey now

A dollar from 1872 is now worth four cents today. You will also note that even though we went through massive bouts of inflation and deflation between 1872 and 1914, the value of the dollar actually rose slightly during that time. 1914 was the year that the Federal Reserve Bank was established. Therefore, a dollar today has the same purchasing power as $0.04 in 1872.

This is why we pay so much attention to inflation in our retirement plan projections. At a historical 3% rate of inflation, the cost of living will double every 24 years. This means that the typical retiree will need twice as much income in their later years to provide the same standard of living on the day they retire.

While inflation has been going down, it does not mean that the cost you pay for things is going down. It simply means that the price is not rising as quickly as it was previously. However, you are still paying the higher prices that were generated from previous inflation.

I thought this was an interesting visual perspective. When I saw the charts, I wanted to share them with you to make sure that you had some context and historical understanding. You will be hearing a lot about inflation in the upcoming election season. Our goal has always been to educate you as we continue “Moving Life Forward”.

© 2024 Jesse Hurst

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

Investors cannot directly invest in indices.

Featured blog image source: iStock.com/Andrii Yalanskyi