Source: U.S. Bank Asset Management Group

Key takeaways

  • Inflation remains a primary concern for investors and consumers.

  • The Federal Reserve made clear that it was determined to take necessary steps to curb inflation.

  • Inflation slowed considerably in the second half of 2022.

Inflation has been a primary focus for investors since the middle of 2021 when it began to emerge as a critical economic concern. For nearly four decades prior to that, inflation had remained modest and drawn little attention. In the spring of 2021, the environment changed considerably. Now the question is what it will take to curtail today’s inflation threat.

In 2021, the cost-of-living, as measured by the Consumer Price Index (CPI), rose 7.0% for the year.1 It was the highest calendar-year reading since 1981 and stood in sharp contrast to the trend over the past 40 years, when inflation averaged 2% to 3% annually. Concerns over elevated living costs carried over into 2022. Over the 12-month period ending in June, CPI rose 9.1%, the largest inflation spike for a 12-month period since November 1981.2  Notably, that appeared to represent a peak for inflation. By the end of 2022, the 12-month CPI reading was 6.5%, and the trends were favorable.3

Inflation trends – 2021 and 2022

Consumer Price Index year-over-year4

The Consumer Price Index (CPI) provides a measure of inflation by tracking the average change over time in the prices paid by urban consumers for a wide range of consumer goods and services. This graph depicts inflation trends by tracking the change in CPI year-over-year.

Source: U.S. Bureau of Labor Statistics, U.S. Bank Asset Management Group

In early 2022, the Federal Reserve (Fed) turned its focus to tempering the inflation threat by raising short-term interest rates and ending its regular investments in the bond market, a strategy known as “quantitative easing.” The Fed’s dramatic shift from what was considered an “easy money” approach changed the investment environment, with both stock and bond markets generating negative returns in 2022.

As the inflation threat has evolved, investors may have questions, such as:

  • How long will this environment persist?
  • Could a resurgence of higher inflation occur again in 2023?
  • How should I position my investments given the reality of today’s environment?


Why inflation matters

Inflation represents increases in the cost-of-living over a given time period. It’s a measure of how much purchasing power is lost due to rising prices. CPI is the commonly cited statistic used to illustrate inflation on a broad level. CPI provides a measure of prices of goods and services that meet the primary needs of consumers, including food items, transportation, housing and medical care. Recent CPI data indicates that inflation remains a significant concern.

The U.S. Commerce Department’s Personal Consumption Expenditure price index, or PCE, is another important inflation gauge, and is considered the U.S. Federal Reserve’s preferred inflation measure. The Fed is the country’s central bank and mandated by Congress to promote full employment, stable prices and moderate long-term interest rates, so watching inflation is essential to their function.

The broad PCE figure rose 5.5% for the one-year period ending in November, demonstrating continued improvement from September and from its June peak reading of 7.0%, which was the highest level in more than 40 years. The narrower “core” PCE gauge (excluding the volatile food and energy categories) showed inflation at 4.7% for the 12 months ending in November. That was modestly down from October and below the peak of 5.3% it reached for the 12-month period ending in February.5


Why has inflation returned?

One reason inflation is a major concern is the ongoing imbalance between supply and demand across specific segments of the economy. As inflation flared up in 2021, the imbalance affected items such as lumber (reflecting significant new construction and remodeling), airfare, lodging and energy costs. “In this unusual economic environment, people spent more on specific items, driving up demand,” says Tom Hainlin, national investment strategist at U.S. Bank Wealth Management.

Some of the difficulties were also attributed to supply chain disruptions. For example, a shortage of semiconductor chips, now a key component in the production of motor vehicles, meant fewer cars at automobile dealerships. The pandemic may be another factor contributing to the current elevated inflation rate, according to Eric Freedman, chief investment officer at U.S. Bank. “Individual countries are managing the response to COVID-19 in different ways. There’s a lack of consistency in COVID protocols, contributing to the persistence of inflation,” says Freedman.

In other words, if countries forced a halt on day-to-day activity to prevent an outbreak, or if COVID-19 infection numbers were on the rise, business productivity may slow, contributing to the supply chain disruption. China is a prime example of this phenomenon. China’s government only recently scaled back its policy of shutting down major cities to contain a COVID outbreak. Yet shortly after removing its restrictions, its COVID infection numbers soared. This added to concerns about potential production delays for some exported goods.

The ongoing Russia-Ukraine war adds another element of risk to the inflationary environment. Russia is a leading exporter of oil and natural gas and a major supplier for most European nations. Both Russia and Ukraine are major agricultural producers as well. Shipping interruptions on the Black Sea, which borders Ukraine to the south, delayed commodity deliveries, although regular shipping of Ukraine’s agricultural products eventually resumed.


How long will higher inflation last?

The Fed has taken significant steps to tame inflation, including dramatic increases to the target federal funds rate it controls. After maintaining a near zero-interest rate policy since early 2020, the Fed began raising rates over the course of 2022 and implemented its latest upward adjustment at the December meeting of the Federal Open Market Committee, setting the fed funds target rate to 4.25% to 4.50%. Haworth notes markets anticipate further rate hikes in early 2023, though recent favorable trends in the inflation rate may lead the Fed to approach rate hikes with a greater degree of caution.

Another aspect of the Fed’s monetary tightening strategy was to end its “quantitative easing” program. Under that program, the Fed purchased $120 billion in U.S. Treasury and mortgage-backed bonds each month to help add liquidity to the market and boost the economy. Now, the Fed is trimming $95 billion per month from a balance sheet that had grown to nearly $9 trillion in assets.

Even with these dramatic steps, there was a delayed reaction to the Fed’s monetary tightening measures, according to Rob Haworth, senior investment strategy director at U.S. Bank. “Fed officials know that monetary policy works with long and variable lags,” says Haworth. “Each rate hike takes 6-12 months to work its way into the economic engine.” That, in part, explains the limited impact the Fed’s actions had on inflation until late 2022. It’s stated target is an annual core (excluding food and energy) PCE reading in the range of 2%.

Haworth says, “While the Fed wants to avoid driving the economy into a recession, its attention is firmly fixed on addressing the inflation situation before it gets out of hand.” The combination of interest rate hikes and reduced asset holdings are the primary strategies the Fed indicates it will continue pursuing as it battles the inflation threat.


Key areas to watch – energy, food and wages

During inflation’s rise, various factors contributed to the surge in the cost of living. Perhaps the most notable when inflation peaked in June 2022 was the energy sector, where costs rose 41.6% over the previous the 12-month period. To illustrate the degree of improvement since then, energy costs jumped a much more modest 7.3% for the 12 months ending in December 2022.3 This reflects tremendous stabilization in oil prices, from $124/barrel in March to approximately $80/barrel in December. Similarly, costs for natural gas declined significantly during that same period.

“As long as wage increases remain at elevated levels, it will contribute to inflationary pressures.”

Rob Haworth, national investment strategist at U.S. Bank Wealth Management

Like energy costs, food prices are another “non-discretionary” expense for households. In December 2022, food prices were up 10.4% for the previous 12-month period, exactly the same as the reading for the 12-month period ending in June. Housing costs also remained elevated, despite significant slowing in housing market activity.

The job market is another area facing its own supply-demand disruptions. While millions remain out of work, the Bureau of Labor Statistics reports there are nearly 10.5 million job openings.6 In addition, a number of people have stepped away from the work force. “Wages continue to grow by about 5% on an annualized basis,” says Haworth. “As long as wage increases remain at elevated levels, it will contribute to inflationary pressures.”

Haworth also notes that investors are watching to see if inflation’s impact, including higher interest rates, will be reflected in corporate earnings reports. “Most companies are holding back on giving forward guidance about earnings in 2023,” says Haworth. “That’s indicative of the uncertain environment that exists today, and it’s keeping companies from being forthcoming with their outlook for the next few quarters.”


How to manage inflation in your financial life

Inflation contributed to recent challenges confronting investors. Stock markets experienced significant volatility and the S&P 500 fell into bear market territory in June (a drop of 20% from its peak) and after a brief recovery, dropped into bear market territory again in September. For much of 2022, bond yields moved up significantly, reflecting the high inflation environment. In October, the yield on the 10-year U.S. Treasury topped 4% for the first time since 2010.

Freedman notes that given the ongoing inflationary environment and the Fed’s response to it, investors may need to re-assess their portfolio choices. “We have concerns about the impact of economic growth slowing.” Freedman believes that the current environment contains potential risks that could result in the “choppy” environment for capital markets continuing for several more months.

Stock markets are likely to remain volatile in the near term. Opportunities in the bond market are more attractive given that higher yields can be earned than was the case earlier in the year. Investors should, however, exercise some caution given the potential for further interest rate increases, as rising rates reduce the value of bonds already on the market.

It may be beneficial to consider whether any adjustments are needed to your portfolio. Generally, a consistent long-term strategy tends to work to the benefit of most investors. That should preclude any dramatic changes in your asset mix as a response to the inflationary environment.

Take time to assess how inflation might impact other aspects of your financial plan. For example, if you have variable interest rate loans, consider locking in a long-term fixed rate on the loan. This may help you avoid future interest rate increases, which could result from the current inflationary environment and shifting Federal Reserve policies.

Be sure to talk with your financial professional about what steps may be most appropriate for your circumstances.

Related articles

Is the economy at risk of a recession?

The Federal Reserve is focused on fighting inflation with aggressive policy moves intended to slow consumer demand. Does this put the economy at risk of a recession in 2023?

How far will the market correction go?

With stocks slipping in and out of bear market territory, learn how the market correction and ongoing volatility could impact your investments.


Start of disclosure content
  1. U.S. Bureau of Labor Statistics, “12-month percentage change, Consumer Price Index, selected categories, December 2021, not seasonally adjusted.”

  2. U.S. Bureau of Labor Statistics, “Consumer Price Index Summary, June 2022,” July 13, 2022.

  3. U.S. Bureau of Labor Statistics, “Consumer Price Index Summary, December 2022,” Jan. 12, 2023.

  4. U.S. Bureau of Labor Statistics, “12-month percentage change, Consumer Price Index.”

  5. U.S. Bureau of Economic Analysis, “Personal Income and Outlays, October 2022,” Dec. 1, 2022.

  6. U.S. Bureau of Labor Statistics, “Job Openings and Labor Turnover Survey,” Nov. 30, 2022.

Start of disclosure content

Investment and insurance products and services including annuities are:
Not a deposit ● Not FDIC insured ● May lose value ● Not bank guaranteed ● Not insured by any federal government agency.

U.S. Wealth Management – U.S. Bank | U.S. Bancorp Investments is the marketing logo for U.S. Bank and its affiliate U.S. Bancorp Investments.

Start of disclosure content

U.S. Bank, U.S. Bancorp Investments and their representatives do not provide tax or legal advice. Each individual's tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

The information provided represents the opinion of U.S. Bank and U.S. Bancorp Investments and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

Start of disclosure content

For U.S. Bank:

Equal Housing Lender. Deposit products are offered by U.S. Bank National Association. Member FDIC. Mortgage, Home Equity and Credit products are offered by U.S. Bank National Association. Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice.

U.S. Bank is not responsible for and does not guarantee the products, services or performance of U.S. Bancorp Investments, Inc.

U.S. Bank does not offer insurance products. Insurance products are available through our affiliate U.S. Bancorp Investments.

Start of disclosure content

For U.S. Bancorp Investments:

Investment and insurance products and services including annuities are available through U.S. Bancorp Investments, the marketing name for U.S. Bancorp Investments, Inc., member FINRA and SIPC, an investment adviser and a brokerage subsidiary of U.S. Bancorp and affiliate of U.S. Bank.

U.S. Bancorp Investments is registered with the Securities and Exchange Commission as both a broker-dealer and an investment adviser. To understand how brokerage and investment advisory services and fees differ, the Client Relationship Summary and Regulation Best Interest Disclosure are available for you to review.

Insurance products are available through various affiliated non-bank insurance agencies, which are U.S. Bancorp subsidiaries. Products may not be available in all states. CA Insurance License #0E24641.

Pursuant to the Securities Exchange Act of 1934, U.S. Bancorp Investments must provide clients with certain financial information. The U.S. Bancorp Investments Statement of Financial Condition is available for you to review, print and download.

The Financial Industry Regulatory Authority (FINRA) Rule 2267 provides for BrokerCheck to allow investors to learn about the professional background, business practices, and conduct of FINRA member firms or their brokers. To request such information, contact FINRA toll-free at 1-800‐289‐9999 or via An investor brochure describing BrokerCheck is also available through FINRA.

U.S. Bancorp Investments Order Processing Information.

Municipal Securities Education and Protection– U.S. Bancorp Investments is registered with the U.S. Securities and Exchange Commission and the Municipal Securities Rulemaking Board (MSRB). An investor brochure that describes the protections that may be provided to you by the MSRB rules and how to file a complaint with an appropriate regulatory authority is available to you on the MSRB website at