Kris Jenner works hard, but market forces work harder: Inflation rose 3.1% through January, disappointing economists whose hopeful forecasts suggested 2.9%. Stripping out volatile categories like food and energy, “core” inflation held steady at 3.9%, climbing 0.4% from last month.
The road to disinflation has been bumpier than anyone really wants it to be, with bathroom breaks and detours — gotta stop to see the sights! — and that's slowed our journey to a 2% target. But January’s numbers still represent a slowdown from December, which means the Federal Reserve’s strategies of aggressively raising federal interest rates and keeping them high are indeed working.
“You get zigs and zags in all these data, and this was just a zag,” says Mark Zandi, chief economist at Moody’s Analytics. “The bottom line: Inflation continues to moderate. It’s still uncomfortably high, though ... moving in the right direction. And all the trend lines still look good aside from today’s data detour.”
It also means that the Fed may pump the breaks on any plans to cut rates anytime soon. But wait — before we get into what this all means for you, let’s talk about what’s driving these numbers, and how you should be handling your money.
So what drove last month’s change in inflation, and what should you do with your money in times like these? Let’s break it down.
First: How is inflation measured?
Inflation is the upward creep of the prices of goods and services. It usually happens because the demand for goods and services is rising faster than companies can produce and supply them. That makes them more scarce, which makes them more valuable, which pushes prices up. When wages don’t rise to match, that creates a decrease in purchasing power. (Translation: Things cost more and you’re not making more, so you can’t buy as many things.)
Inflation is often measured using a standard benchmark called the Consumer Price Index (CPI), which you might have heard of. The CPI is calculated by looking at a standard set (“basket”) of goods (food, medical care, clothing, etc) and averaging their change in price over time.
There’s also a measure called “core inflation,” which is basically all that stuff, minus food and energy prices. It can be easier to judge what’s really happening in the economy when you exclude them, because food and energy tend to be more volatile, driven by short-lived factors, and just overall less reflective of economic health.
And the last measure to know about is called Personal Consumption Expenditures (PCE). It’s a bit broader than the CPI and weighs some things like health care a bit more heavily. It’s also the measurement that the Federal Reserve considers the most when they make policy decisions.
What drove January 2024’s inflation numbers?
If rent has become a four-letter word in your household, you’re not alone. In fact, it’s “shelter costs” to blame for stubborn inflation, especially this month. Rents of primary residences rose 6.1% in January. (Homeownership also rose 6.2% over a year earlier.)
While economists expect rent and housing costs to cool eventually, especially as new data for cheaper leases signed gets entered into the system, that doesn’t necessarily soothe the anxieties of the average American, for whom it’s a real pain point.
What else? Food away from home rose 5.1%, while food at home rose 1.2%, giving parents everywhere a new talking point for their post-school drive-through negotiations with their children. Services, in general, skyrocketed: motor vehicle insurance climbed more than 20%, household repairs rose by 18.2%, and sporting events admissions rose by 13.5% (the cheapest tickets to the Super Bowl this year were $7,500; call it the Taylor Effect). Staying at home has never been a more effective strategy for saving money.
Btw, if you notice egg prices are up again? It’s not just inflation, it’s the avian flu.
What are the bright spots? Energy fell by 4.6% and airline fares fell by 6.4%. It’s not too early to book that summer travel …
How should you manage your money right now?
It’s impossible to know what will happen in the future, especially right now, but here are some things to think about.
Don’t keep more than you need to in cash
This is something we say anyway — but when inflation is high, cash gets less valuable, so the advice becomes even more urgent. Here’s what we recommend always keeping in cash (as in, in an FDIC-insured bank account):
Money to pay your bills
Your emergency fund (three to six months’ worth of take-home pay)
Savings for short-term goals (things you’ll need money for in the next one to two years)
If you’re the kind of person who tips a little more toward “cautious” on the risk tolerance scale, you could consider adding a bit more to your emergency fund — if things are going to cost more later, your savings might not go quite as far.
But for the rest of your money, we typically recommend investing it.
Shop around for the best interest rates on savings
Higher federal interest rates lead to higher interest rates paid by savings accounts. If you have a large chunk of cash in the bank (like a complete emergency fund, for example), see if you can find a savings account paying more.
Keep investing regularly
If you’re investing for long-term goals (those more than a few years away), we’d probably recommend that you just keep doing what you’re doing. Every period of inflation is different, and in the past, it’s affected different types of investments in different ways (which is, after all, the point of having a diversified portfolio).
We do know (and as we’ve seen this year) periods of economic uncertainty tend to make the markets nervous, which can lead to volatility. So we recommend using a technique called dollar-cost averaging, which means investing regularly, a little bit at a time, no matter what’s going on in the market. You’ll end up investing when markets are up and down in a way that evens out over time. It takes the timing guesswork out of it.
Plus, we don’t know how long higher inflation will last — there’s always a chance that it could slow sooner than experts expect. Either way, the longer your timeline, the less inflation is likely to impact your eventual bottom line.
(By the way, when you invest with Ellevest, we take hundreds of different economic scenarios — including ones like this — into account as we build your forecast.)
TL;DR: We don’t know how long this period of higher inflation will last. All we can do is try to make the best choices we can with the information we have — and adjust along the way.