As in-person education resumes for students this fall, tuition costs, especially for higher education, are top of mind for many parents and grandparents. Although college tuition rose at a historically low rate for the 2020-2021 academic year,1 those hoping for a reduction in college costs going forward may be disappointed. Small increases or freezes may be more common for the remainder of this school year and next.2 One reason is something you may have heard a lot about in recent months: inflation.
Inflation rose at the fastest pace in more than a decade this spring
Rising prices at the gas pump, grocery store and for raw materials used in manufacturing have been hard to ignore in recent months. Prices for big ticket items, from furniture and appliances to airfare and new and used vehicles also began to rise as the economic recovery picked up steam this spring. In fact, the U.S. Bureau of Labor Statistics reported that the Consumer Prices Index accelerated in April and May at the fastest pace since 2008, rising 4.2% and 5.4%, respectively.3
CPI is a measure of the average change over time in the prices paid by consumers for a broad range of goods and services. It is used to help measure price movements within specific categories, such as college tuition and fixed fees, which account for 1.5% of CPI. (The broader education category, a component of the tuition, other school fees, and childcare index, represents 3% of CPI.)
Should you be worried?
Whether you're facing higher tuition bills or paying more at the pump, a rise in inflation can be concerning—especially for those in or nearing retirement. It means you will have to spend more money for the same things. However, inflation itself is not inherently bad.
According to John J. Canally, Jr., CFA, IMG Chief Portfolio Strategist, following a recession, inflation is a positive sign that the economy is recovering, and demand is picking up. It only becomes worrisome when the inflation level continues to rise beyond the Fed's target rate.
The Federal Reserve's (the Fed's) preferred measure of inflation, which excludes the more volatile food and energy sectors—has risen at just 1.8% over the past 30 years, well below the Fed's target of 2%. In the prior 30 years, from 1961 to 1991, inflation averaged 4.6%.
Canally says that while news about ships stuck in the Suez Canal or a shortage of chicken wings during the Super Bowl tend to garner a lot of media attention, investors should avoid getting caught up in the hype.
"Price hikes and dips are routine in a free-market economy," he said. "However, when inflation is so low for an extended period of time, like we've experienced in recent years, it doesn’t garner as much attention."
Why It's Different This Time
Whether inflation will persist at elevated levels or prove to be transitory remains a question for investors, consumers and the markets. Canally weighs the case for both scenarios below.
The case for permanently higher inflation
While consumer expectations have remained low and stable, as the chart below indicates, they began to tick up during the second quarter of this year.