Connect with us

Infographics

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

Published

on

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

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.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading
Comments

Infographics

How Experts Think About Bear Market Opportunities

We look at quotes from investing legends like Warren Buffett and Peter Bernstein to take cues on how investors should approach a down market.

Published

on

How Experts Think About Bear Market Opportunities

Today, the majority of Americans are worried a bear market is looming.

The good news: there are silver linings. Bear markets can present bargains for investors, thanks to inefficient pricing and fear in the market. Going further, many investing greats have made key investments during market downturns including:

  • Warren Buffett: Automotive sector during the 2008 Global Financial Crisis
  • Shelby Davis: Financial sector during the 1997 Asian Financial Crisis
  • Peter Bernstein: Gold during the 2000 Dot-Com Crash

In this infographic from New York Life Investments, we show four quotes on bear market opportunities and the data behind their insight.

How Experts Think About Bear Market Opportunities

When faced with the challenges of a bear market, how do experts respond?

1. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

— Warren Buffett, CEO of Berkshire Hathaway

Just like a bargain on socks may be an opportunity for buyers, a bargain on stocks is an opportunity for potential upside. In fact, the S&P 500 Index has seen double-digit gains 85% of the time after extremely pessimistic sentiment since 1987.

Investor pessimism can be measured by a ‘bull-bear spread’. This is based on an AAII survey that measures investor expectations for the market in the next six months. It is calculated by taking the percentage of investors who are ‘bullish’ on the market minus those who are ‘bearish’.

For example, in the week of April 29, 2022:

  • Bullish: 16.4%
  • Bearish: 59.4%
  • Bull-Bear Spread: – 43

Here’s how the S&P 500 Index performed after periods of extreme investor pessimism:

DateBull-Bear SpreadS&P 500 Index
12-Month Return
10/19/1990-5426%
3/6/2009-5167%
10/5/1990-4422%
9/21/1990-4325%
11/16/1990-4321%
4/29/2022-43?
8/17/1990-4118%
1/11/2008-39-36%
3/14/2008-39-41%
8/31/1990-3823%
2/21/2003-3735%
10/16/1992-3614%
7/9/2010-3625%
9/14/1990-3521%
10/26/1990-3526%
2/20/2009-3544%
4/12/2013-3514%
12/21/1990-3417%
7/21/2006-3424%
1/25/2008-34-38%

Source: Bloomberg, 5/12/22

As the above chart shows, investor pessimism is at its highest in 20 years.

Instead of thinking of how bad the market is doing, investors may be better of thinking of the market as being significantly less expensive.

2. “History provides crucial insight regarding market crises: they are inevitable, painful, and ultimately surmountable.”

Shelby Davis, founder of Shelby Cullom Davis & Company

Bear markets hurt. On the bright side, they only account for 29% of the market environment, with bull markets making up the lion’s share (71%). What’s more, stocks have spent the vast majority of time at or near their all-time highs.

Market EnvironmentDescription% of Time in Market Environment
All-Time HighStock market hits all-time high35%
Bull Market DipStock market falls under 10% from all-time high33%
Bull Market CorrectionStock market falls over 10% but less than 20% from all-time high3%
Bear Market DrawdownStock market falls over 20% from peak to trough10%
Bear Market RecoveryTime it takes to reach next all-time high19%

Source: Morningstar Direct, PerformanceAnalytics, UBS 4/30/2022. Based on monthly returns from 1945.

Overall, stocks have spent around two-thirds of the time at or near all-time highs.

3. “The most important lesson an investor can learn is to be dispassionate when confronted by unexpected and unfavorable outcomes.”

— Peter Bernstein, economist and financial historian

To avoid falling for the behavioral pitfalls of a market cycle, investors can identify key macro indicators of each stage. Below, we show the economic indicators and how they associate with each type of market cycle.

Market CycleMonetary Policy Shock*Consumer SentimentEmploymentSalesPurchasing Managers Index (PMI)
BullPositivePositivePositiveHighly PositiveHighly
Positive
CorrectionPositiveNegativePositiveNegativeNegative
BearPositiveHighly
Negative
Highly NegativeHighly NegativeHighly
Negative
ReboundHighly
Negative
PositiveNegativeNegativeNegative

Source: Goulding, L. et al., May 2022. *Represents an unexpected move in monetary policy.

As the above table shows, bear markets are associated with low consumer sentiment, high unemployment, low corporate sales, and weak manufacturing performance—with a high number of macroeconomic shocks.

4. “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

— Winston Churchill, former Prime Minister of Britain

Just like bear markets can stoke investor uncertainty, rising interest rates can cause stock market disruption. However, since 1954 the S&P 500 Index has returned an average 9.4% annually during Fed rate hike cycles.

Fed Rate Hike CycleS&P 500 Index Annualized Total Return
Aug 1954 - Oct 195714%
Jun 1958 - Nov 195924%
Aug 1961 - Nov 19667%
Aug 1967 - Aug 19694%
Mar 1972 - Jul 1974-9%
Feb 1977 - Jun 198111%
Mar 1983 - Aug 198413%
Jan 1987 - May 198916%
Feb 1994 - Feb 19954%
Jun 1999 - May 200010%
Jun 2004 - Jun 20068%
Dec 2015 - Dec 20188%

Source: Morningstar, Haver Analytics, March 2022

Not only that, the S&P 500 Index has had positive returns 11 out of 12 times during periods of rising interest rates. Despite the short-term impact to the market, stocks often weather the storm.

Finding Bright Spots

In summary, it is helpful to remember the following historical characteristics of a bear market:

  • Extreme pessimism
  • Short-lived
  • Higher macroeconomic shocks (employment, sales, PMI)

Investors can find opportunities by considering a contrarian point of view and learning from the time-tested experience of investing legends.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Infographics

Retirement Savings: How to Calculate If You’re on Track

This graphic shows how to plan for sufficient retirement savings, and how the U.S. population measures up at each step.

Published

on

Retirement savings by age group, to help people gauge their own retirement planning. Retirement balances get bigger until age 65-74 and go down for those over age 75.

This infographic is available as a poster.

Retirement Savings: How to Calculate If You’re on Track

Setting a retirement savings goal can be overwhelming. In fact, one in three Americans have no idea what they need to save to retire at their target age.

Luckily, we can use a retirement calculator to help outline what you need to consider. This graphic from New York Life Investments walks you through setting your retirement savings goal, and shows how the U.S. population measures up at each step.

Step 1: Your Age

A calculator will typically start by asking for your current age and your target retirement age. This is to determine how long you have left to build up your investments. In the U.S., the average age of retirement has remained relatively stable and is currently 62.

Keep in mind that your retirement age can depend on many factors:

  • Your cost of living
  • Your job satisfaction
  • Your debts
  • Your spouse’s retirement plan
  • Your health

After you have your projected retirement age figured out, you’ll also need to estimate the length of your retirement.

The life expectancy for Americans at birth is 77 years. Once you’ve lived to age 65, that number is higher. This is because you’ve survived many untimely causes of death, including the higher mortality associated with childhood. The below table shows how the expected age of death changes as you age.

 At BirthAt Age 65
Male7482
Female8085
Both Sexes7784

To estimate your particular lifespan, you’ll also need to consider things like your genetics and your lifestyle. Having an idea of how long you might live may help you better manage longevity risk, or the risk you’ll outlive your savings.

Step 2: Your Savings

The next step in setting your retirement savings goal is to take stock of how much you’ve already saved. For context, here is how much Americans have saved for retirement by age group.

 Median BalanceAverage Balance
< 35$13,000$30,170
35-44$60,000$131,950
45-54$100,000$254,720
55-64$134,000$408,420
65-74$164,000$426,070
> 75$83,000$357,920

You’ll also need to decide how much you’ll be putting toward your retirement each year. Experts typically recommend saving about 15% of your pre-tax income. This can include your employer’s contributions, if any. Of course, this amount will vary based on how early you start saving and when you plan to retire.

Your expected investment earnings will play a big role, too. Here is what average annual returns have been for different types of portfolios based on historical data from 1928-2021.

 Conservative
(80% bonds, 20% stocks)
Balanced
(40% bonds, 60% stocks)
Growth
(20% bonds, 80% stocks)
Nominal Return8%10%11%
Real Return5%7%8%

Inflation has averaged about 3% each year. Remember to include inflation in your calculations so you can maintain purchasing power in retirement.

Step 3: Your Income

In the final step of setting your retirement savings goal, you’ll need to decide how much of your current household income you will use in retirement. Financial experts typically estimate you could need 70-80% of your pre-retirement income.

At this stage, it can be helpful to plan out a detailed budget. Here’s a spending overview for the average American over age 65.

CategoryAnnual Spending
Housing$17,435
Healthcare$6,668
Transportation$6,221
Food$5,698
Donations, Child and Spousal Support$3,119
Personal Insurance and Pensions$2,721
Entertainment$2,293
Clothing$821
Alcohol and Tobacco$635
Other$2,033

Other includes personal care products and services ($505), education ($450), reading ($157), and miscellaneous expenses ($921).

Now that you have an estimate of your expenses, you can factor in all sources of income you expect to receive in retirement. This helps narrow down what you need to have set aside in your retirement savings. For instance, most people collect Social Security in addition to their own pension. The below table shows what percentage of retirees have each income source.

SourceRetirees Age 65 and OlderAll Retirees
Social Security92%78%
Defined Contribution or Defined Benefit Pension66%57%
Interest, Dividends, or Rental Income49%43%
Wages, Salaries, or Self-employment25%32%
Cash Transfers Other Than Social Security7%11%

Respondents could select multiple answers. Sources include the income of a spouse or partner.

Based on all this information, a retirement calculator will estimate whether you are on track to sufficiently fund your retirement years.

Turning a Retirement Savings Strategy Into Action

It’s important to note that retirement calculators are a starting point. To come up with a customized strategy, you’ll likely want to consider:

  • Your current and expected tax rate
  • Increases in your income and savings rate
  • A contingency plan for unexpected events

However, retirement calculators can make the concept of retirement savings more concrete—and help you take action toward your goals.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading
New York Life Investments

Subscribe

Are you a financial advisor?

Subscribe here to get every update, including when new charts or infographics go live:

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Popular