Yahoo Finance Inflation Relief: Here’s How a 2% Rate, Expected in 2025, Would Help Your Wallet
Inflation has cooled down, albeit being still stubborn and showing signs that its deceleration will still take some time. Although it ticked down slightly in May, at 3.3% from 3.4% in April, according to the latest Consumer Price Index (CPI) data released June 12, it’s still a far cry from the Federal Reserve’s 2% target.
This has been hurting consumers on many levels, whether it’s at the grocery store or to pay rent and mortgages.
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To put this in context, while inflation has come down from the record 9.1% it stood at in June 2022, as well as the 4% it stood at a year ago in May 2023, according to CPI data, it is still far off the Fed’s stated 2% target. And it is also far off from where it stood in May 2020: 0.1%.
In turn, it came as no surprise that the Fed chose to keep its rates steady following its Federal Open Market Committee (FOMC) meeting which concluded on June 12. In addition, Fed officials expect only one cut in 2024, down from the previous several cuts anticipated, according to its June 12 Summary of Economic Projections.
Against this backdrop, when could inflation reach the Fed’s 2% inflation target and would this really change consumers’ lives and finances — or are there other factors at play?
Here is what experts had to say about it.
Also see how the presidential candidates might affect inflation.
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2% Late Next Year; Real Wages To Grow
According to Matt Colyar, economist at Moody’s Analytics, when inflation returns to the Fed’s 2% target, which he expects by late next year, he anticipates the U.S. labor market will have a bit more slack.
“This means wages will grow slower than their current 4.5% pace toward 3% to 3.5%,” he said. “Real wages — coarsely, the difference in the growth rate between inflation and wages — would be rising 1% to 1.5% per year. That is economic growth.”
Colyar added that households spend different shares of their income on different components, but real wage gains represent an increase in wealth and an ability to purchase more — quality or quantity.
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In addition, in terms of the dearth of housing in the U.S., this will translate into rent prices expected to grow faster than broader inflation.
Indeed, in May, prices for shelter were up 5.4% over the past year, well above the overall 3.3% inflation rate, according to the CPI data.
“This means that the real wage gains I mentioned above will be less enjoyed by those who spend a higher share of their income on rent,” Colyar said. “Food inflation, over the near and intermediate term, is expected to adhere closer to the Fed’s broader inflation target.”
More Savings
As Michael Collins, CEO of WinCap Financial, explained, the average American would save about 2% more of their income when the inflation rate is at 2%.
“This means that if someone earns $50,000 a year, their savings would increase by $1,000,” explained Collins, who added that while this may not seem like a significant amount, it can add up over time and provide a cushion for unexpected expenses or help toward long-term financial goals, especially if you are taking advantage of the power of compounding interest.
In addition, he said, with a lower inflation rate, the cost of goods and services will also increase at a slower pace, allowing individuals to stretch their savings even further.
Less Reliance on Credit
Another consequence of inflation getting down to 2% would be less reliance on credit — something that has been taking a toll on many Americans who live paycheck to paycheck.
This could ultimately mean that costs of goods and services would generally stabilize, and it could similarly lead to more stability and predictability in consumers’ monthly budgets, said Charlie Wise, SVP and head of global research and consulting at TransUnion.
“Ultimately, this could lead to less of a reliance on credit products such as credit cards simply to get by month to month and potentially a slowing in overall balance growth among these products,” Wise said.
In addition, as inflation approaches the Fed’s 2% target, the Fed will start cutting interest rates, which will impact interest rates for credit products, including credit cards, he said.
“That means that consumers who do continue to use card credit, as well as those who open new loans like personal loans and mortgages, will see lower monthly payments on that debt.”
A Lot of the Damage ‘Already Done’
While a lower inflation rate would definitely help consumers, a lot of the damage has already been done.
“Prices have risen a cumulative 20% over the past couple of years,” said Ted Rossman, senior industry analyst at Creditcards.com. “And many consumers believe a misconception that lower inflation means prices will roll back to 2019 levels.”
As Rossman explained, lower inflation simply means prices are growing more slowly.
“The real key here is wage growth,” Rossman said. “Wage growth has been outpacing inflation in recent months. That’s what we need to see more of. For example, you’d rather have your wages growing 4% if inflation is 3% than your wages growing 2% if inflation is also 2%.”
Stephen Kates, CFP, principal financial analyst at Annuity.org, echoed the sentiment, saying the cumulative 20% increase in overall prices since 2020 is here to stay. Despite all the recent news of Target, McDonald’s and other stores lowering their prices, they are lowering them from an already elevated level, he said.
“A 2% inflation rate is still an increase in prices on an annual basis, just a slower one than we’ve been accustomed to seeing since 2022 when inflation really took off,” Kates said. “It’s also important to note that 2% inflation is higher than the average inflation rate from 2010 to 2020, which was 1.72%.”
Yet, Kates also noted that as inflation falls, Americans should expect to feel less anxiety when they are shopping for everyday items because price increases will be less noticeable.
“However, true savings will depend on wages more than inflation,” he said. “Currently wage growth is outpacing inflation by roughly 0.5% and has been for the last two years. If this trend continues, Americans may begin to not only feel more breathing room but also see it in their paychecks.”
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This article originally appeared on GOBankingRates.com: Inflation Relief: Here’s How a 2% Rate, Expected in 2025, Would Help Your Wallet
