On Friday, June 10^th, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers increased 1.0% in May after rising 0.3% in April. Worse, over the past 12 months, the Consumer Price Index increased 8.6%.

According to BLS, “the increase was broad-based, with the indexes for shelter, gasoline, and food being the largest contributors. After declining in April, the energy index rose 3.9% over the month with the gasoline index rising 4.1% and the other major component indexes also increasing. The food index rose 1.2% in May as the food at home index increased 1.4%.”  Further:

• The index for all items less food and energy rose 0.6% in May, the same increase as in April.
• While almost all major components increased over the month, the largest contributors were the indexes for shelter, airline fares, used cars and trucks, and new vehicles.
• The indexes for medical care, household furnishings and operations, recreation, and apparel also increased in May.

Largest Increase Since 1981

On a 12-month basis:

• CPI increased 8.6% for the 12 months ending May
• This is the largest 12-month increase since the period ending December 1981
• The all items less food and energy index rose 6.0% over the last 12 months
• The energy index rose 34.6% over the last year, the largest 12-month increase since the period ending September 2005
• The food index increased 10.1% for the 12-months ending May, the first increase of 10% or more since the period ending March 1981

Historical Inflation

Inflation in the United States has averaged around 3.3% from 1914 until 2022, but it reached an all-time high of 23.70% in June 1920 and a record low of -15.80% in June 1921.

Most will remember the high inflation rates of the 70s and early 80s when inflation hovered around 6% and occasionally reached double-digits. But so far in 2021 and 2022, inflation seems to have gone up every single month – which you no doubt already know – because you’re feeling it.

Inflation: The Retirement Killer

Inflation decreases the purchasing power of your money in the future and unfortunately, many don’t factor inflation into their retirement plans.

Consider this: at 3% inflation, $100 today will be worth $67.30 in 20 years – a loss of 1/3 its value.

Said another way, that same $100 will only buy you $67.30 worth of goods and services in 20 years. And in 35 years? Well your $100 will be reduced to just $34.44.

What Investors Need to Remember

Therefore, it is imperative that your long-term retirement strategies account for inflation and
that you prepare for a decrease in the purchasing power of your dollar over time. You should strongly consider assuming that inflation will be more than 3% – its historical average.

It’s true that inflation today hovers over 8% – quadruple  the Federal Reserve’s target inflation rate – but a better assumption might be one based on the last 100-years of data.

If you’re wrong and you find that the inflation rate for the next 25 years turns out to be 2%, then the purchasing power of your retirement savings will be more, not less.

Your financial advisor can create models with various inflation scenarios so you can better understand – and account for – inflation’s true impact to your retirement.