Personal Finance

Here’s the inflation breakdown for July 2024 — in one chart

Published

2 months ago

August 14, 2024

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Inflation continued to retreat in July, aided by easing price pressures for consumer staples like food and energy and physical goods like new and used cars.

The consumer price index, a key inflation gauge, rose 2.9% in July from a year ago, the U.S. Department of Labor reported Wednesday. That figure is down from 3% in June and the lowest reading since March 2021.

The CPI gauges how fast prices are changing across the U.S. economy. It measures everything from fruits and vegetables to haircuts, concert tickets and household appliances.

“I think it’s right down the strike zone,” Mark Zandi, chief economist of Moody’s, said of the CPI report.

Perhaps the most important thing for consumers is inflation for groceries “continues to grow very slowly,” Zandi said.

Combined with similar good news for other necessities like gasoline and market rents for new tenants, “that’s really encouraging news, particularly for the lower-income consumers that are the most hard pressed,” he added.

Inflation guides Fed interest rate policy

The July inflation reading is down significantly from the 9.1% pandemic-era peak in mid-2022, which was the highest level since 1981.

It’s also nearing policymakers’ long-term target, around 2%.

“We think we’re though the worst of it from an inflation perspective,” said Joe Seydl, senior markets economist at J.P. Morgan Private Bank.

The U.S. Federal Reserve uses inflation data to help guide its interest rate policy. It raised rates to their highest level in 23 years during the Covid-19 pandemic era, pushing up borrowing costs for consumers and businesses in a bid to tame inflation.

Recent labor market data has spooked some investors, who fear it signals a U.S. recession may be near. Many economists say those concerns are overblown, at least for now.

Nonetheless, easing inflation coupled with a cooler labor market make it likely that Fed officials will start cutting interest rates at their next policy meeting in September, economists said. Doing so would reduce borrowing costs, helping buoy the economy.

“In short, this CPI report represents more good data and adds to the evidence supporting a [0.25 percentage point] September rate cut,” Paul Ashworth, chief North America economist at Capital Economics, wrote in a note Wednesday.

Housing is a stumbling block

Housing is the one major impediment keeping inflation elevated above the Fed’s target right now — on paper, at least, economists said.

Shelter is largest component of the CPI, and therefore has an outsized effect on inflation readings.

The shelter index has risen 5.1% since July 2023, accounting for more than 70% of the annual increase in the “core” CPI, the BLS said Wednesday. (The core CPI is economists’ preferred gauge of inflation trends. It strips out food and energy costs, which can be volatile.)

Consumer prices rose 0.2% in July, in line with expectations

After declining to 0.2% in June on a monthly basis, shelter inflation jumped back to 0.4% in July, the BLS reported.

Housing inflation moves up and down at glacial speed due to how the government measures it, economists said. Such data quirks mask positive news in the real-time rental market, which has seen inflation flatline for about two years, Zandi said.

Excluding shelter — which is likely warranted given measurement issues — “we’re at the Fed’s target and then some,” Zandi said.

“Mission accomplished, in my view,” he said of the fight against inflation.

After stripping out shelter, the CPI rose 1.7% in July, below the Fed’s annual target.

Economists broadly expect shelter CPI inflation to continue to throttle back slowly given prevailing trends for market rents.

Other ‘notable’ categories

Motor vehicle insurance, medical care, personal care and recreation are some other indexes with “notable” increases over the last year, according to the BLS.

Prices in those categories are up 18.6%, 3.2%, 3.4% and 1.4%, respectively.

A surge in new and used car prices a few years ago is likely now fueling high inflation for car insurance premiums and vehicle repair, since it generally costs more to insure and repair pricier cars, economists said.

Insurance inflation should ultimately fade alongside falling car prices, they said. New vehicle prices are down 1% over the past year, and those for used cars and trucks have declined almost 11%.

Egg prices — which had surged in 2022 due to a historic outbreak of bird flu — are rising again following a reemergence of the deadly disease. They’re up 19% from a year ago.

Other food categories including bacon and crackers are up over the past year (by 8.5% and 3%, respectively), but their prices fell during the month of July, suggesting more potential declines ahead.

Overall annual grocery inflation was 1.1% in July, down from an average 11.4% in 2022, which was the highest since 1979.

How supply and demand impacted inflation

Inflation for physical goods spiked as the U.S. economy reopened in 2021. The Covid-19 pandemic disrupted supply chains, while Americans spent more on their homes and less on services such as dining out and entertainment.

It is a different story now. Goods inflation has largely normalized, while the services sector is a fly in the ointment, economists said.

However, services inflation — generally more sensitive to labor costs — should ease further due to a slacker job market and declining wage growth, economists said.

High interest rates have also served to reduce overall inflation by reducing demand, Seydl said.

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Personal Finance

Maximum Social Security retirement benefit: Here’s who qualifies

Published

19 hours ago

October 17, 2024

Business Finance News

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Millions of Social Security beneficiaries will benefit from the 2.5% cost-of-living adjustment for 2025, set to take effect in January.

With that increase, the maximum Social Security benefit for a worker retiring at full retirement age will jump to $4,018 per month, up from $3,822 per month this year, according to the Social Security Administration.

But while those maximum benefits will see a $196 monthly increase, retirement benefits will go up by about $50 per month on average, according to the agency.

The average monthly benefit for retired workers is expected to increase to $1,976 per month in 2025, a $49 increase from $1,927 per month as of this year, according to the Social Security Administration.

Who gets maximum Social Security benefits?

The highest Social Security benefits generally go to people who have had maximum earnings their entire working career, according to Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities.

That cohort generally includes a “very small number of people,” he said.

Because Social Security retirement benefits are calculated based on the highest 35 years of earnings, workers need to consistently have wages up to that threshold to earn the maximum retirement benefit.

“Very few people start out at age 21 earning the maximum level,” Van de Water said.

Social Security is a key issue for voters, survey finds: Here’s how to maximize benefits

Workers contribute payroll taxes to Social Security up to what is known as a taxable maximum.

In 2024, a 6.2% tax paid by both workers and employers (or 12.4% for self-employed workers) applies to up to $168,600 in earnings. In 2025, that will go up to $176,100.

Notably, that limit applies only to wages that are subject to federal payroll taxes. If a wealthy person has other sources of income, for example from investments that do not require payroll tax contributions, that will not affect the size of their Social Security benefits, said Jim Blair, vice president of Premier Social Security Consulting and a former Social Security administrator.

How can you increase your Social Security benefits?

There are beneficiaries who are receiving Social Security checks amounting to more than $4,000 per month, and they usually have waited to claim until age 70, according to Blair.

“Technically, waiting until 70 gets you the most amount of Social Security benefits,” Blair said.

By claiming retirement benefits at the earliest possible age — 62 — beneficiaries receive permanently reduced benefits.

At full retirement age — either 66 or 67, depending on date of birth — retirees receive 100% of the benefits they’ve earned.

And by waiting from full retirement age up to age 70, beneficiaries stand to receive an 8% benefit boost per year.

By waiting from age 62 to 70, beneficiaries may see a 77% increase in benefits.

However, because everyone’s circumstances are different, it may not always make sense to wait until the highest possible claiming age, Blair said.

Prospective beneficiaries need to evaluate not only how their claiming decision will impact them individually, but also their spouse and any dependents, he said.

“You have to look at your own situation before you apply,” Blair said.

Also, it is important for prospective beneficiaries to create an online My Social Security account to review their benefit statements, he said. That will show estimates of future benefits and the earnings history the agency has on record.

Because that earnings information is used to calculate benefits, individuals should double check that information to make sure it is correct, Blair said. If it is not, they should contact the Social Security Administration to fix it.

Personal Finance

Inherited IRA rules are changing in 2025 — here’s what to know

Published

19 hours ago

October 17, 2024

Business Finance News

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What to know about the 10-year rule

Before the Secure Act of 2019, heirs could “stretch” inherited IRA withdrawals over their lifetime, which helped reduce yearly taxes.

But certain accounts inherited since 2020 are subject to the “10-year rule,” meaning IRAs must be empty by the 10th year following the original account owner’s death. The rule applies to heirs who are not a spouse, minor child, disabled, chronically ill or certain trusts.

Since then, there’s been confusion about whether the heirs subject to the 10-year rule needed to take yearly withdrawals, known as required minimum distributions, or RMDs.

“You have a multi-dimensional matrix of outcomes for different inherited IRAs,” Dickson said. It’s important to understand how these rules impact your distribution strategy, he added.

After years of waived penalties, the IRS in July confirmed certain heirs will need to begin yearly RMDs from inherited accounts starting in 2025. The rule applies if the original account owner had reached their RMD age before death.

If you miss yearly RMDs or don’t take enough, there is a 25% penalty on the amount you should have withdrawn. But it’s possible to reduce the penalty to 10% if the RMD is “timely corrected” within two years, according to the IRS.

Consider ‘strategic distributions’

If you’re subject to the 10-year rule for your inherited IRA, spreading withdrawals evenly over the 10 years reduces taxes for most heirs, according to research released by Vanguard in June.

However, you should also consider “strategic distributions,” according to certified financial planner Judson Meinhart, director of financial planning at Modera Wealth Management in Winston-Salem, North Carolina.

“It starts by understanding what your current marginal tax rate is” and how that could change over the 10-year window, he said.

Roth conversions on the rise: Here's what to know

For example, it could make sense to make withdrawals during lower-tax years, such as years of unemployment or early retirement before receiving Social Security payments.

However, boosting adjusted gross income can trigger other consequences, such as eligibility for college financial aid, income-driven student loan payments or Medicare Part B and Part D premiums for retirees.

Personal Finance

Nearly 2 in 5 cardholders have maxed out a credit card or come close

Published

23 hours ago

October 17, 2024

Business Finance News

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Between higher prices and high interest rates, some Americans have had a hard time keeping up.

As a result, many are using more of their available credit and now, nearly 2 in 5 credit cardholders — 37% — have maxed out or come close to maxing out a credit card since the Federal Reserve began raising rates in March 2022, according to a new report by Bankrate.

Most borrowers who are over extended blame rising prices and a higher cost of living, Bankrate found.

Other reasons cardholders blame for maxing out a credit card or coming close include a job or income loss, an emergency expense, medical costs and too much discretionary spending.

“With limited options to absorb those higher costs, many low-income Americans have had no choice but to take on debt to afford costlier essentials — at a time when credit card rates are near record highs,” Sarah Foster, an analyst at Bankrate, said in a statement.

As prices crept higher, so did credit card balances.

The average balance per consumer now stands at $6,329, up 4.8% year over year, according to the latest credit industry insights report from TransUnion.

At the same time, the average credit card charges more than 20% interest — near an all-time high — and half of cardholders carry debt from month to month, according to another report by Bankrate.

Carrying a higher balance has a direct impact on your utilization rate, the ratio of debt to total credit, and is one of the factors that can influence your credit score. Higher credit score borrowers typically have both higher limits and lower utilization rates.

Credit experts generally advise borrowers to keep revolving debt below 30% of their available credit to limit the effect that high balances can have.

As of August, the aggregate credit card utilization rate was more than 21%, according to Bankrate’s analysis of Equifax data.

Still, “if you have five credit cards [with utilization rates around] 20%, you have a lot of debt out there,” said Howard Dvorkin, a certified public accountant and the chairman of Debt.com. “People are living a life that they can’t afford right now, and they are putting the balance on credit cards.”

Generation X at risk

Gen X most likely to max out their credit cards, survey finds

More than any other generation, Gen Xers in their 40s and 50s are most likely to have maxed out a credit card or come close in the past two and a half years, according to Bankrate’s report.

Of Gen Xers, 27% have maxed out their credit cards compared to 23% of millennials and 17% of Baby Boomers. Young adults in Gen Z are the least likely to have maxed out a card, according to the survey, which polled more than 3,500 adults, including 3,015 who are credit cardholders and 1,104 who have either maxed out their credit cards or come close.

Gen X, the so-called “sandwich generation,” must contend with supporting the generations ahead of them and their children at a time when the costs of higher education and health care have never been higher, studies also show.

Potential problems ahead

Cardholders who have maxed out or come close to maxing out their credit cards are also more likely to become delinquent.

Credit card delinquency rates are already higher across the board, the Federal Reserve Bank of New York and TransUnion both reported.

“Consumers have been measured in taking on additional revolving debt despite the inflationary environment over the past few years, although there has been an uptick in delinquencies in recent months,” said Tom McGee, CEO of the International Council of Shopping Centers.

A debt is considered delinquent when a borrower misses a full billing cycle without making a payment, or what’s considered 30 days past due. That can damage your credit score and impact the interest rate you’ll pay for credit cards, car loans and mortgages — or whether you’ll get a loan at all.

Some of the best ways to improve your credit standing come down to paying your bills on time every month, and in full, if possible, Dvorkin said. “Understand that if you don’t, then whatever you buy, over time, will end up costing you double.”