Alexander Frei
Americans can readily see the effects of record-high inflation every time they shop. Prices have soared, from the grocery store to the gas pumps, and although inflation has cooled, families are still feeling the pinch.
And the harm doesn’t end there: Inflation is also making stock markets appear stronger than they really are and cutting into returns for everyone, including those with retirement accounts.
We seldom hear about that last point. When media outlets discuss the latest inflation rate, they typically highlight the average annual percentage change in the Consumer Price Index (CPI). The CPI is an index that tracks a basket of goods, including housing, food, energy, insurance, and more, measuring the average price increases of these items over time.
From 2016 to 2020, the inflation rate averaged 1.9 percent, which resulted in a cumulative price increase of about 7.7% over four years. The Federal Reserve Bank’s target rate—about 2%—typically goes unnoticed by consumers, as wages tend to rise at a similar pace.
But from 2021 to the present, the inflation rate has averaged 4.9%, leading to a cumulative price increase of 19.6%. At these elevated levels, wages struggle to keep up, making inflation more noticeable for consumers. A recent poll revealed that 63% of voters believe the U.S. economy is on the wrong track and 62% characterize it as weak.
Yet despite this negative sentiment, the stock market appears to be booming. On October 21, the Dow Jones and the S&P 500 hit all-time highs.
However, these indexes alone don’t tell the full story. Inflation can distort how we perceive market gains. While it may appear that investments in the stock market are yielding record-breaking returns, these returns are more moderate once they’re adjusted for inflation.
In short, inflation not only hurts consumers—it hurts investors (which includes most Americans). » Read More
https://www.heritage.org/budget-and-spending/commentary/inflation-artificially-pumps-the-stock-market