Bracing for inflation to clobber your budget? Take a deep breath.
Ever since the Federal Reserve started pumping scads money into the economy during the Great Recession, some politicians and economists have been warning that runaway inflation is an inevitable result of the extra cash. But it doesn’t look like 2016 will be the year it happens.
The Federal Reserve projects an overall inflation rate of 1.6 percent for 2016, below the Fed’s stated inflation target of 2 percent annually. By comparison, inflation was about 1.25 percent between October 2014 and October 2015. Even so, In historical terms, inflation remains extremely low.
A few caveats: This rate doesn’t take into account the costs of food and energy, which can throw things off for the average consumer who, of course, needs to buy both. Also, these numbers are national averages, and rates vary somewhat between regions and cities.
It’s also worth noting that the Federal Reserve uses a rate based on Personal Consumption Expenditures, which is different from the Consumer Price Index that is widely reported as the inflation rate. The two measures generally move together, however. (The Wall Street Journal has an excellent explanation of the differences.)
In the big picture, this modest inflation coupled with modest wage growth will actually allow many people to be slightly more prosperous, if 2015 patterns hold. From November 2014 to November 2015 (the most recent data available), real average wage growth was 1.8 percent, according to the Bureau of Labor Statistics. So after accounting for inflation, most people were taking home slightly more money than a year earlier.
The overall inflation rate (by either method of calculating it) takes into account a number of goods and services, and weights them. The proportions that make up the federal benchmarks may not reflect your individual spending patterns — particularly if you have large medical or education bills — so let’s take a look at inflation by sector:
Food prices at the supermarket are expected to go up between 2 percent and 3 percent in 2016, a range that’s within the historical average, according to the U.S. Department of Agriculture. The price of going out to eat should go up a bit faster, with prices rising between 2.5 percent and 3.5 percent. The USDA notes that these numbers assume typical weather patterns and could be affected if there is more drought in California or other extreme weather conditions that could damage crops. It also assumes gas prices staying roughly where they are.
The U.S. Energy Information Administration expects gas prices to average $2.36 per gallon, which includes taxes paid at the pump. It should be noted that gasoline is a commodity that varies considerably in price from region to region. In other energy costs, the administration expects the costs for electricity, home heating oil and natural gas to remain roughly static this year.
The College Board predicts that in this current school year (2015-2016) tuition costs for a four-year, public college, at in-state rates, will go up by 2.9 percent, while room and board will go up by 3.6 percent. Overall — combining tuition, room, board and fees — students at these institutions will see a 3.3 percent increase. Private, four-year schools and out-of-state students both will see a total increase of 3.5 percent.
Health care costs are increasing far faster than the costs of other sectors, though the rate of increase is slowing. Phew! Even so, consulting firm PricewaterhouseCoopers expects costs to go up by 6.5 percent in 2016.
Housing prices are expected to go up — again, subject to significant variation depending on the region. Zillow predicts a 3.5 percent increase in home prices, based on their survey of 100 experts. That’s good news for those with a home, but Zillow also predicts that the rising costs means Americans with earnings in the bottom third will be priced out of the home buying market. They also forecast a steep increase in rents — which could hit historical highs — which is more bad news for that bottom third who can’t afford to buy.
Car prices can be all over the map, depending on make, model, age and condition, so there are very few people willing to make predictions, but Kelley Blue Book has looked at historical data and noted that car prices have been rising. From December 2014 to 2015, the average price of a new car went up by 0.9 percent, which is below the rate of inflation.
Has inflation been a factor in your buying habits? What price changes are you seeing in your daily life? Share with us in comments or on our Facebook page.