Bracing for inflation to clobber your budget? Take it easy. While it looks like inflation will be higher this year than in 2016, the price increases should be fairly modest.
The Federal Reserve projects an inflation rate of 1.9 percent for 2017, just below the Fed’s stated inflation target of 2 percent annually. The Fed predicts a core inflation rate of 1.8 percent. The core rate excludes food and energy. For comparison, inflation was about 1.5 percent between October 2015 and October 2016.
(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.)
If you’re feeling like you maybe don’t have as much money as you did last year, that’s typical. Real average weekly earnings over the period of November 2015 to November 2016 increased only 0.5 percent. So any raise you got was likely eaten up by higher prices. Low wage growth has been the economic reality in the United States for decades (unless you’re in the top 1 percent). It’s safe to expect that to continue this year.
The overall inflation rate (by either calculation) takes into account a number of goods and services, and weights them.
How you are personally affected, however, will depend on where you live — since there are some regional differences — and your spending patterns, particularly if you have major medical or education costs. So let’s take a look at inflation in six key sectors:
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Food prices at the supermarket are expected to increase between 0.5 percent and 1.5 percent in 2017, a range that’s within the historical average, according to the U.S. Department of Agriculture. The USDA notes that these numbers assume typical weather patterns, but increases could be greater if there are extreme weather conditions that damage crops. “In particular, the drought in California could have large and lasting effects on fruit, vegetable, dairy and egg prices,” according to the USDA. At the same time, a stronger U.S. dollar should help offset dramatic increases. When the dollar is high, U.S. farmers have a harder time exporting food, leading to greater supply domestically and better prices at the supermarket.
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The U.S. Energy Information Administration expects gas prices to average $2.30 per gallon, which includes taxes paid at the pump. (Gasoline is a commodity that varies considerably in price from region to region, so if you’re in Texas or other Gulf Coast states, you’ll probably pay below the average, while drivers on the West Coast and the Northeast U.S. typically pay more.) Both heating oil and natural gas are expected to be pricier this year. Home heating oil is forecast to climb from $2.12 to $2.62 per gallon. Natural gas prices are expected to rise sharply this year from $10.24 per thousand cubic feet to $11.02. Electricity prices are also likely to go up, though not as dramatically, from $12.53 per kilowatt-hour to $12.87. This would be a good time to put in a request for mild weather, or better, make some of these free or cheap energy-saving moves.
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The College Board notes that in this current school year (2016-2017), tuition and fees for a four-year, public college at in-state rates are up by 2.4 percent, while room and board is up by 2.9 percent. Overall — combining tuition, room, board and fees — students at these institutions are seeing a 2.7 percent increase. Private, four-year schools and out-of-state students both see a total increase of 3.4 percent.
The College Board did not have cost projections for the 2017-2018 academic year that begins in the fall. You can look at its calculator and play with different levels of inflation to estimate future costs — and, no, they don’t offer any scenarios in which prices decrease. But as the board notes, “relatively few students pay the full ‘sticker price.'” So, if you’re trying to anticipate the cost for higher education, it may be more useful to focus on college savings plans, such as 529 plans and trends in scholarships and financial aid.
4. Health care
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Health care costs are increasing faster than costs in other sectors, though the rate of increase is flattening, at least for now. Consulting firm PricewaterhouseCoopers expects health care costs to rise 6.5 percent in 2017, the same as last year. The firm warns that the rate of increase could start getting higher next year.
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Housing prices are expected to go up — again, subject to significant variation depending on the region. Zillow predicts a 3.6 percent increase in home values, based on their survey of 100 experts. (Experts we cited in this recent post put the increase higher. Real Estate research firm CoreLogic predicted home values will grow by 4.7 percent in 2017 while Redfin, an online real estate brokerage, put the expected increase at 5.3 percent.)
Zillow notes that President-elect Donald J. Trump could have some impact on home prices if he follows through on his pledge to reduce immigration levels. That could reduce the labor pool, forcing builders to pay higher wages for construction — costs that would be passed along to buyers. Zillow predicts rent increases will slow, and renting will be more affordable than it has been for the past two years.
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Kelley Blue Book has looked at historical data and noted that car prices continue to rise. From December 2015 to 2016, the average price of a new car went up by 1.5 percent. While this number marks an all-time high for car prices, it is a reflection of consumer tastes more than inflation.
“Higher average transaction prices are reflective of the rapid shift in consumer demand away from cars and into trucks and utility vehicles, which are more expensive,” said Tim Fleming, analyst for Kelley Blue Book. “Should the sales mix of cars to SUVs reach a stable point in the near future, actual transaction price growth could match or fall just short of inflation.”
Also, incentives for vehicle purchases have grown, bringing down the effective price, Fleming said.
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.