5 myths about inflation—busted

We have good news and bad news. The good news is a lot of financial information is available on the Internet. The bad news is not all of it is good or even accurate. With that in mind, our experts set out to dispel five myths related to inflation.

Myth 1: Falling inflation means falling prices
You may be hearing on the news that year-over-year inflation has moved downward from its peak. Yet, prices still feel high in stores and restaurants—the places that impact your everyday life. This is especially true for low-income earners who don't have enough savings or wealth to cover rising costs of basic needs such as car insurance and rent. So, what gives?

"When economists, the Fed and politicians say that inflation is getting better, we mean that the year-over-year rate of inflation is lower than it was the previous month," explained BOK Financial® Chief Investment Strategist Steve Wyett. In other words, while prices are still rising, they are not rising by as much as they were before. But the bottom line is that prices are still rising.

Myth 2: Tariffs will make current inflation worse
You’ve probably been hearing a lot about tariffs in the news lately. Although the tariffs on imports from Canada and Mexico were placed on pause for 30 days, there is the potential that they will be imposed after the period ends and that Canada’s retaliatory tariff also will be imposed. Meanwhile, the 10% tariff on imports from China already has started, as has China’s tariffs of up to 15% on some U.S. imports. More recently, Trump announced he would be introducing a 25% tariff on car, chips and drug imports by as soon as April 2, but many are interpreting the move as a bargaining tool.

So, what are tariffs and will they make things more expensive for the typical consumer? For starters, a tariff is a tax imposed by a government on importing or exporting goods. It creates a source of revenue for the government.

Placing a tariff on an imported good increases the price of that good. Simplistically, the imposition of a tariff would raise the price of the imported good by the amount of the tariff—which, in theory, would mean the same good produced domestically in the U.S. would cost less. However, that’s not always the case. "The domestic producer is going to price its good as close to the tariff price as possible," Wyett noted. That means domestically priced goods also could cost more.

In turn, consumers could:

• Be willing to pay the higher price of the imported good.
• Buy a less expensive similar domestic good, if there is one available.
• Buy an alternative good.
• Choose not to buy anything and save their money.

Across this range of options, we see different impacts on overall economic activity, which could include slower overall growth.

However, none of these impacts, including potentially higher inflation, are immediate. As BOK Financial Chief Investment Officer Brian Henderson explained, “Consumers aren’t likely to see the effects on goods’ prices from tariffs for at least a couple of months, if they even remain in place for that long.”

So, while tariffs could mean inflation, we need to wait and see for now.

Myth 3: The Fed controls prices
The Federal Reserve is the central bank of the United States and is charged with setting monetary policy for the country but does not control prices directly.

Instead, the Fed sets the target range for the Federal Funds rate, the overnight interest rate that banks charge each other to borrow money. In turn, that rate closely influences the interest rates you pay on personal and business loans and credit cards, and the interest you earn on your savings accounts and CDs.

"The Fed raises and lowers rates in order to influence saving and borrowing behavior. When they lower rates, consumers and businesses tend to borrow more, which helps accelerate the economy. Still, those changes occur through a trickle-down effect, not direct pricing directives," explained Wyett. "When the Fed changes rates, it takes a while for those changes to ripple through the economy. In the current environment where the Fed is lowering rates, they are aiming to strike a balance and get inflation down to their 2% target."

Learn more about how that works.

Myth 4: Inflation affects everyone equally
Inflation has been lingering, with nearly everyone feeling the pinch in their wallet. However, if you think inflation affects everyone equally, think again. Those who rent an apartment or home feel the effects of inflation far more than homeowners with a fixed-rate mortgage locked in and the ability to grow equity in their home.

"Renters do not gain from real estate appreciation and asset accumulation, and rent payments are subject to increase over time, often annually. This lack of predictability can lead to higher living expenses for renters," explained Sherri Calcut, president of BOK Financial Mortgage®.

"Owning a home with a fixed-rate mortgage versus renting can offer advantages as having the stability of a constantly fixed housing payment over the life of the loan, which typically spans 15 to 30 years."

In other words, inflation can affect people differently depending on their living situation and other factors.

Myth 5: Pay automatically keeps up with inflation
With inflation hanging on throughout the past year, you might expect your pay would rise in order to keep up. However, it’s dependent on other factors as well. Just as cost-of-living depends on individual circumstances such as location, each worker’s situation is different based on their job function, performance, incentive arrangements, the financial health of the employer and so much more—only some of which is in their control.

"When the cost to live and provide outpaces the incomes workers earn, there are incentives to look for ways to earn more money, such as seeking out other roles and working longer hours,” said Brian Henderson, chief investment officer for BOK Financial. The demand for workers with specific skills and the supply of those workers also impacts pay, he noted, so some people may choose to gain specific skillsets or education in high-demand areas.