Copyright Forbes
Katie Klingensmith, Chief Investment Strategist, Edelman Financial Engines. It’s nearly impossible to have a conversation with family, friends or co-workers about the U.S. economy without hearing the word “inflation.” Inflation shapes what households pay, how much they save and how they invest. Yet the constant stream of changing headlines can make it difficult for households to keep perspective or know what to act on. Inflation is hovering around 2.9% year over year, meaning consumer prices are increasing on average by that amount compared to a year ago, reducing the purchasing power of each dollar and gradually making goods and services more expensive over time. Down from the peaks of 2022 but still above the Federal Reserve’s 2% long-term goal, it continues to shape policy debates and household budgets alike. Prices are rising here and easing there, and policymakers are weighing their next move. For most people, the real question is more personal: What do these numbers mean for my financial life? Understanding The Basics The consumer price index (CPI) tracks the change in prices paid by urban consumers (those living in cities or metropolitan areas, comprising approximately 93% of the U.S. population) for a fixed basket of goods and services. The personal consumption expenditures price index (PCE), on the other hand, is broader than CPI and adjusts for changes in consumer behavior, which is one reason the Federal Reserve relies on it as its primary gauge. The producer price index (PPI) looks at prices received by domestic producers. It can signal pressure moving through supply chains that may later show up for consumers. Each of these measures captures a different slice of the economy. That is why the inflation story rarely fits in a single number. It is also why the path from prices to personal decisions is not automatic. Households benefit from a structured process that turns complex data into actionable decisions. The Psychology Of Inflation Inflation is not only about current prices. It is also about what people think will happen next. Expectations shape behavior. When households expect higher prices, they may choose to spend sooner or negotiate for higher wages. When businesses expect rising costs, they may increase prices or adjust operations to protect margins. Those choices can keep inflation elevated, even as some parts of the economy cool. Recent consumer surveys reflect that mindset. The New York Fed’s latest Survey of Consumer Expectations found one-year inflation expectations still above 3%, suggesting households continue to anticipate higher prices even as official measures ease. Tariffs are adding to that feeling. They have pushed certain prices higher, but the steady stream of news around new or potential tariffs has amplified the perception that costs are climbing everywhere. The increases are often gradual. Companies often absorb some costs initially, then pass the remainder on to consumers over time. Yet, the public narrative makes it feel faster and broader than it is. The result has been a kind of inflation fatigue that is being felt on a daily basis. Even when inflation cools, everyday life can still feel costly. That gap between the data and sentiment is one reason inflation can be so stubborn. Turning Data Into Action So, what can consumers and investors do with this knowledge? Consider these steps: 1. Translate the indicators into categories you actually spend on. Look at headline CPI and PCE to understand broad direction. Then pay attention to components that matter most to your household, such as shelter, services, transportation or food at home. If prices for things you buy often are rising, try to set aside a little extra in your budget. If they ease, don’t assume it will last. Keep saving consistently. 2. Stress-test your goals based on the idea of rising prices. Instead of assuming inflation will quickly return to the Fed’s target, consider that elevated costs could persist for a while. Think about how a few more years of rising prices might affect your budget, savings targets or major purchases. Adjusting a little now, by saving more, spacing out expenses or leaving room for essentials, can make your plan more resilient later. A modest change made early is far easier than a major adjustment after the fact. 3. Keep your investment approach diversified and disciplined. Inflation does not move in a straight line, and neither do markets. A diversified allocation helps you participate when conditions are favorable and stay resilient when they are not. Rebalancing on a regular cadence keeps risk in line. Avoid the temptation to chase last month’s winners or to time the next data release. Monthly data matters to policymakers and traders, but long-term investors should focus on process. 4. Communicate clearly. If you share finances with a partner or family, agree on a few simple rules for the next year. For example, set a target savings rate, a threshold for discussing larger purchases and a plan to revisit your budget quarterly. Clarity reduces stress when headlines are noisy. It also makes it easier to stick with decisions you have already thought through. The Bottom Line Remember that inflation can manifest as both a statistic and a feeling. Even when the numbers improve, day-to-day life can still feel costly. In this environment, consistency is your biggest advantage. Small habits compound, especially when conditions are uncertain. You cannot control the path of CPI, PPI or PCE, but you can control how you respond. By understanding what the indicators measure, recognizing how expectations affect behavior and following a clear process, you can make decisions that support your goals through a range of outcomes. That is how you turn headline noise into action. The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
