The price of Thanksgiving dinner is one small area we have to be grateful for in the battle against higher inflation.
According to data from The American Farm Bureau Association, the average cost of a Thanksgiving dinner for 10 people is down for a second year in a row.
NOT THE WHOLE STORY ON INFLATION
While it is a positive sign that food prices seem to be stabilizing, a further look at inflation data paints a more problematic tale.
As we can see from this chart, the overall cost of Thanksgiving dinner is still above pre-pandemic levels even though it has dropped the past two years.
DISINFLATION NOT DEFLATION
While certain parts of the Consumer Price Index (CPI), have experienced year over year deflation, or an outright drop in prices, overall prices remain much elevated from pre pandemic levels. From a total CPI standpoint, we have seen “disinflation” not “deflation.”
Disinflation is a slowing of the rate of inflation, but is not an outright drop in prices.
I think this is a key distinction that has people frustrated with the inflation narrative.
We keep hearing in the media that inflation is “cooling” or “dropping” but overall this does not mean that prices are actually falling. It just means they are increasing slower after the big inflation spike we had in 2021 and 2022.
In fact, cumulatively inflation has already increased more so far this decade (2020-2024) than it did the previous entire decade (2010-2020)!
The total inflation in the U.S. from January 2010 to December 2020, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), was approximately 20.55%. This means that, on average, prices increased by about 20.55% over this ten-year period.
The cumulative inflation in the U.S. from January 2020 to October 2024, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), was approximately 21.97%. This indicates that, on average, prices increased by about 21.97% over this period.
People are not naive to this and feel it in their everyday spending. This is evidenced by the recent election where an overwhelming majority of people cited the economy as their number one voting issue.
Digging deeper into this, voters polled in the key swing states of Pennsylvania and Michigan, who were focused on the economy, further cited inflation as the most important factor.
FIGHTING BACK ON INFLATION
While we have little control of what inflation actually does, there are two important things we can control within our finances to help us combat inflation over the long haul.
- Having a good understanding of your income and expenses: By default, many who are locked in a low mortgage are actually benefiting tremendously from higher inflation. As an example, If you have a 3% mortgage, and inflation is rising 3% a year, you are essentially paying a 0% real interest rate on your mortgage. Not all debt is bad, and a healthy level of fixed rate debt actually provides a good hedge against rising inflation. In other areas of spending that aren’t fixed, it’s important to at least track annually how your income and expenses have changed to see if any adjustments are needed.
- Continuing to invest enough of your money into assets that have beaten inflation: While we can never guarantee the future, historically speaking, investing over the long term has helped investors far outpace inflation. The chart below in this research piece from MFS summarizes this nicely. Stocks have been especially effective for those investors with longer time horizons who can handle the ups and downs. This makes sense since investing in stocks is equivalent to buying shares of businesses. As a shareholder of a business you participate in the profits of that business. When there are inflationary pressures on businesses, businesses attempt to pass those costs on to us the consumers in the form of higher prices on the goods and services they sell. To the extent it doesn’t impact demand, those higher prices translate into higher profits for businesses. Even for investors with a shorter time horizon, treasury bills and bonds have also slightly outpaced inflation and provide a good alternative to letting too much cash sit in a traditional checking or savings account earning little to no interest.
POSITIVE SIGNS
Recent data has shown the pace of inflation has continued to moderate but remains above the Federal Reserves long term objective of 2.0%. The positive reports on inflation have allowed the Fed to cut short term interest rates at their last two meetings. While we continue to wait for the inflation rate to hopefully fall further, the best we can do as consumers and investors is to continue to control what we can control.
Enjoy a nice Thanksgiving meal with family and friends. Hopefully the knowledge the meal was a little less expensive than last year makes it even a little bit tastier!
