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The Inflation Rate in the U.S.: Past, Present, and Future

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The Inflation Rate in the U.S.: Past, Present, and Future

View the high resolution version of this infographic. Buy the poster.

The inflation rate in the U.S. has surged, reaching 7% year-over-year in December 2021. This marks the highest level in 40 years.

In this graphic from New York Life Investments, we look back at historical inflation—and where experts think it may be headed next.

What is Inflation?

Before we dive into the data, let’s take a look at what inflation means. Inflation measures how quickly the prices of goods and services are rising. Moderate price growth is generally a sign of a healthy economy. As the economy grows, consumer demand increases and prices go up.

There are two types of inflation.

  • Cost-push inflation: Production costs, such as materials and wages, increase. Supply declines due to higher costs, and businesses pass costs on to the consumer through higher prices.
  • Demand-pull inflation: Consumer demand surges. Supply declines due to higher demand, which means consumers are willing to pay more and prices rise.

We are currently experiencing both cost-push inflation and demand-pull inflation. This is different from the other inflationary periods over the past 50 years, where rising energy prices led to cost-push inflation.

The History of the Inflation Rate in the U.S.

We measured inflation using data from the Consumer Price Index, which measures the change in price that urban consumers pay for a basket of goods and services. The data shows the year-over-year change from December of the prior year and is not seasonally adjusted.

Here’s what the inflation rate in the U.S. looked like from 1965 to 2021.

YearInflation Rate
19651.92%
19663.46%
19673.04%
19684.72%
19696.20%
19705.57%
19713.27%
19723.41%
19738.71%
197412.34%
19756.94%
19764.86%
19776.70%
19789.02%
197913.29%
198012.52%
19818.92%
19823.83%
19833.79%
19843.95%
19853.80%
19861.10%
19874.43%
19884.42%
19894.65%
19906.11%
19913.06%
19922.90%
19932.75%
19942.67%
19952.54%
19963.32%
19971.70%
19981.61%
19992.68%
20003.39%
20011.55%
20022.38%
20031.88%
20043.26%
20053.42%
20062.54%
20074.08%
20080.09%
20092.72%
20101.50%
20112.96%
20121.74%
20131.50%
20140.76%
20150.73%
20162.07%
20172.11%
20181.91%
20192.29%
20201.36%
20217.00%

There are a number of periods in history where the inflation rate in the U.S. was heightened. For instance, a booming economy in the late ‘60s led to rising prices. President Nixon implemented wage-price shocks to halt inflation, but this eventually caused a recession.

In the years that followed, surging oil prices were a primary culprit behind periods of higher inflation. The early ‘70s were impacted by the oil embargo, when OPEC countries stopped oil exports to the United States. At the same time, U.S. oil producers didn’t have additional capacity and non-OPEC oil sources were declining as a proportion of the world oil market. This meant the U.S. was unable to increase supply to meet demand, and OPEC countries had more power to influence oil prices.

Fast forward to 2021, and the COVID-19 recovery has again led to a higher inflation rate in the United States. A number of factors are responsible, including surging consumer demand, supply chain problems, and a labor shortage.

Inflation During a COVID-19 Recovery

Amid lockdown restrictions, demand for goods increased dramatically. It remained high even after demand for services recovered. Compared to February 2020 levels, demand for goods in December 2021 was 22% higher.

To make matters worse, business inventories are at record lows. Retailers can cover just over one month of sales from existing inventories, down 25% compared to February 2020. Not only that, there is a severe labor shortage. Total private job openings increased from 6.2 million in February 2020 to 9.6 million in November 2021.

The lack of supply is leading to higher material and wage costs for businesses, with some categories hit particularly hard. For instance, the price of used cars and trucks has risen over 37% as the semiconductor shortage hampers the production of new vehicles.

Forecasting the Inflation Rate in the U.S.

Over the next few years, various institutions expect the inflation rate in the U.S. to stabilize.

 OECDIMFU.S. Federal Reserve
20201.4%1.4%1.3%
20217.0%7.0%5.8%
2022P4.8%5.9%2.6%
2023P2.5%2.7%2.3%

Note: The OECD and IMF measure inflation with the Consumer Price Index (CPI), whereas the U.S. Federal Reserve measures inflation using Personal Consumer Expenditures (PCE).

To combat inflation, the Federal Reserve is looking to raise interest rates. This encourages people to spend less and save more. It has also begun tapering asset purchases, which is intended to reduce spending by lowering the amount of money in circulation.

However, for inflation to moderate near the 2% target, issues beyond consumer demand—like supply chain hiccups and labor shortages—will also need to be resolved.

»Do you want to protect your portfolio against inflation? Learn which asset classes have beat inflation in recent years.

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Infographics

Rising Rates: Why Value Stocks Have Outperformed

During periods of rising interest rates, value stocks have historically outperformed growth. Below, we explain the factors behind this trend.

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Value Stocks

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The Benefits of Value Stocks in Rising Rate Environments

As investors flock to safety, value stocks have outperformed growth stocks year-to-date amid economic turbulence and rising interest rates.

Owing to their strong fundamentals and cash flows, value stocks may be returning into favor.

In this infographic from New York Life Investments, we illustrate why value stocks offer opportunities in rising rate periods.

Recent Performance

In a matter of two years, the Ukraine war, supply chain shocks, and COVID-19 have led inflation to multi-decade highs.

Amid these complex struggles, value stocks have outperformed significantly.

  • Russell 1000 Value Index: -1.1%
  • Russell 1000 Growth Index: -14.1%
  • S&P 500: -8.4%

As of April 14, 2022

With higher inflation predicted for the medium term, value stocks may be staging a comeback.

As investors look to de-risk their portfolios, many are turning to value stocks, thanks in part to their historical outperformance during inflationary and rising rate periods.

Value vs. Growth: Key Characteristics

As a quick refresher, here are the key distinctions between value stocks and growth stocks.

CharacteristicValue InvestingGrowth Investing
Defining FeaturesCompanies with stronger cash flows, steady income, priced below intrinsic value.Companies with lower cash flows, low (if any) income, strong earnings growth potential.
ValuationUndervalued (low P/E ratios)Overvalued (high P/E ratios)
DividendsMore commonLess common
VolatilityLowerHigher
SectorsFinancials, Energy, Healthcare, IndustrialsTech, Communications, Consumer Discretionary

Cyclical sectors such as financials and energy often benefit when prices increase after an economic contraction.

Since companies earn money in different ways, it is often useful to compare price-to-earning (P/E) ratios within a sector. A P/E ratio is a metric for valuing a company, where a company’s stock price is divided by its earnings per share.

An overvalued company in the tech sector may have a P/E ratio of 100, while the S&P sector average is 24. By contrast, an undervalued healthcare company may have a P/E ratio of 14, lower than the S&P sector average of 16.

When a company is undervalued it means that it’s trading below its intrinsic value.

Value vs. Growth: Performance

Looking back, the previous decade saw the worst performance for value in the last 90 years.

On average, growth outperformed value by 7.8% annually since 2010. However, looking at 10-year periods, value has outperformed growth over every decade since the 1940s.

DecadeValue Outperformance
1930s-0.5%
1940s10.8%
1950s5.6%
1960s4.2%
1970s8.1%
1980s7.4%
1990s0.7%
2000s8.0%
2010s-2.6%

Average annual performance of Fama and French (“HML”) value factor by decade.
Source: Fama & French via Mercer (Mar 2021)

Now, against economic uncertainty and other structural shifts, the growth and value divergence is beginning to change for the first time in over a decade.

What is Driving Value Stocks?

On a broader level, the following forces have driven outperformance in value stocks and growth stocks.

 Value InvestingGrowth Investing

Broad Market Factors
  • Rising interest rates
  • Market recovery
  • Inflationary environment
  • Long-term earnings track record
  • Low interest rates
  • Bull market
  • Disinflationary environment
  • Rising corporate earnings

So how do these apply today?

In an inflationary (and rising rate) period, current earnings become more valuable and future earnings become less valuable. Typically, “value stocks” are assessed based on their current earnings while “growth stocks” are valued on their future earnings.

Consequently, inflationary periods have tended to favor value stocks and deflationary periods have tended to favor growth stocks. When prices are climbing, companies with actual earnings are potentially better positioned to increase prices and retain profit margins.

At the same time, it is important for investors to avoid value-traps, which are companies trading below value that are in financial duress. To help mitigate this challenge, active investment managers can help identify the appropriate companies.

Sign of the Times

It’s worth noting that this isn’t about value vs. growth. Instead, different styles have performed better at different times. Of course, it’s important for investors to consider a number of variables for their portfolios:

With these in mind, investors can implement the best strategies to help achieve their goals.

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Infographics

How to Optimize Retirement Plan Design for Your Client

Here’s how advisors can enhance retirement plan design to help employees and plan sponsors reach their retirement goals.

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Retirement Plan Design

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How to Optimize Retirement Plan Design for Your Client

More than ever, retirement plans are looking at an employee’s entire retirement picture.

In line with this trend, advisors are offering personalized services to help people reach their goals. But as retirement plans begin to expand their products and services, unidentified gaps remain in employees’ retirement needs.

To help advisors identify these disconnects, this infographic from New York Life Investments shows the key priorities across both employees and their employers to help optimize retirement plan design.

Are People Achieving Their Retirement Vision?

Today, retirement is an issue that can no longer be ignored.

Nearly 70% of Americans say the country faces a retirement crisis and 54% are worried about a financially secure retirement. Making matters worse, the pandemic has led one in three workers to rethink their retirement timeline.

To look deeper into retirement plan design, NYL Investments partnered with RTI Research, surveying 800 people:

  • 500 Plan Participants: Employees with 401(k)/ 403(b) plans
  • 150 Plan Sponsors: Companies offering 401(k) plans
  • 150 Plan Providers: Advisors providing 401(k) services

Here are the results they found.

Preparedness for Retirement

Two structural trends—lack of savings and not having access to a retirement plan at work—are impacting retirement readiness today.

By a significant margin, the survey found that men (45%) feel more prepared for retirement than women (30%), which may be explained by historically higher earnings.

How does retirement preparedness break down by age group?

AgeVery Well PreparedSomewhat PreparedNot Very Well Prepared
20s45%23%21%
30s42%44%14%
40s30%41%29%
50s34%38%28%
60s37%53%9%
Average37%42%21%

On average, 37% of employees felt very prepared. Despite those in their 40s often hitting their highest-earning potential, employees in this age bracket felt the least prepared.

Retirement Plan Features

What aspects of their retirement plan did survey participants feel very satisfied with?

Feature% Who Feel Very SatisfiedSomewhat PreparedNot Very Well Prepared
Employer commitment to retirement preparedness58%23%21%
Plan provider62%44%14%
Plan performance58%41%29%
Ease of account management66%38%28%
Number of investment options given58%53%9%

Compared to other variables, participants felt most satisfied with the ease of account management of their retirement plan along with their plan provider.

Retirement Plan Design: 3 Key Priorities

When it comes to actual planning for retirement, what were the three most important factors among participants?

  • Right balance of growth & risk in portfolio: 84%
  • Saving enough for retirement: 86%
  • Work-life balance: 87%

Interestingly, the importance of work-life balance increased with age.

While 78% of people in their 20s said this was very important, it increased to 92% of people in their 50s. The same pattern emerged for having enough savings for retirement. Over 75% of people in their 20s said this was extremely important. For those in their 50s, this jumped to 96%.

Retirement Plan Design: 3 Gaps

Let’s now look at some of the biggest gaps in retirement plan design. Here is where participants were least satisfied with their plan provider:

Service% Satisfied
Managing the cost of healthcare53%
Having a roadmap to ensure I’m doing the “right thing” to plan for retirement57%
Working to get out of debt67%

As the above findings suggest, not only are participants looking for guidance with their 401(k) investments, they are looking for personal financial advice on managing debt and healthcare costs.

These gaps make sense: the U.S. has the highest healthcare costs in the world, averaging $12,500 per person per year or three times higher than the OECD country average.

The Employer’s Perspective

Let’s now take a look at how employers viewed retirement plan design.

Retirement Plan Design: Key Priorities

Across all firms, what were the three most important factors for their employees?

  • Managing the cost of healthcare: 90%
  • Saving enough for retirement: 85%
  • Work-life balance: 85%

Both employers and employees alike placed saving enough for retirement near the top.

Retirement Plan Design: 3 Gaps

Which services do employers offer the least?

Service% Offered
Working to get out of debt23%
How to access Social Security and other retirement accounts33%
Saving enough for retirement34%

Interestingly, while 85% of employers place saving enough for retirement as a key priority, the vast majority of employers don’t offer these services in retirement plans.

To address these gaps, advisors can create a well-thought-out financial wellness program for employers that bridges the disconnect.

Understanding the Disconnect

Over the last five years, retirement plans that offer advice have risen 44%.

The evidence is clear: employers value providing their employees personalized advice. Here are some key insights on providers, and where the disconnects lie.

Plan Providers: Key Disconnects

While 93% of all plan providers surveyed offer advisory services, just 62% offered services that were educational.

Meanwhile, younger advisors felt employees had stronger financial literacy and knowledge of retirement services compared to more tenured advisors by a wide margin. A similar trend followed for advisors at smaller plan providers versus larger firms.

However, more tenured advisors at larger firms were more likely to offer in-person consultations at the workplace. The same was true for providing employees with information to make more informed investment decisions.

Next, while some of the largest disconnects from participant and employer needs center around managing debt and healthcare costs, the majority of plan providers don’t offer them:

3 Gaps in Providers% Offer Service
Working to get out of debt35%
Managing cost of healthcare29%
Work-life balance34%

Importantly, new opportunities arise when advisors connect with participants and employers in areas that matter most.

Optimizing Retirement Plan Design

When employees and sponsors are active participants in their retirement journey, advisors can provide human-centered advice, personalized skills, and holistic planning models.

Based on the above findings, advisors can strategically enhance retirement plan design to align with participants’ and employers’ financial needs.

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