2021 Inflation Analysis
Many income tax rates, exemptions, deductions, etc. are adjusted each year for inflation. The annual inflation numbers are based upon the year ended August 31. This gives the IRS enough time to determine the actual inflation number for the following year.
Inflation has been fairly tame for the 20 years leading up to 2020. However, the pandemic has certainly changed this and the change has been dramatic. We have not seen this high of inflation since the early 1980s and I am old enough to remember that period was not much fun to live through.
The following table shows the inflation numbers for 2020 and 2021. The monthly change column shows the amount of change compared to the previous month and the annualized column shows the amount of inflation if that months number was annualized (i.e. multiplied by 12). The final inflation number for 2021 was about 6.7%
| 2020 | 2021 | Monthly Change | Annualized | |
| Jan | 257.971 | 261.582 | 0.43% | 5.10% |
| Feb | 258.678 | 263.014 | 0.55% | 6.57% |
| Mar | 258.115 | 264.877 | 0.71% | 8.50% |
| Apr | 256.389 | 267.054 | 0.82% | 9.86% |
| May | 256.394 | 269.195 | 0.80% | 9.62% |
| Jun | 257.797 | 271.696 | 0.93% | 11.15% |
| Jul | 259.101 | 273.003 | 0.48% | 5.77% |
| Aug | 259.918 | 273.567 | 0.21% | 2.48% |
| Sep | 260.280 | 274.310 | 0.27% | 3.26% |
| Oct | 260.388 | 276.589 | 0.83% | 9.97% |
| Nov | 260.229 | 277.948 | 0.49% | 5.90% |
| Dec | 260.474 | 278.802 | 0.31% | 3.69% |
As you can see the trend of inflation in 2021 is not linear. There are some small months and some very large months. The Federal Reserve finally has realized that this may not be transitory and we will likely see at least 4 increases in the discount rate and each increase may be larger than normal.
This may result in interest rates being perhaps 2-3% higher at the end of 2022 than at the beginning. Even though rates have ticked up some, it may be very prudent to lock in low rates now.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
It’s misleading to compare the inflation rate in one single year with an entire era of high inflation without putting the data into context. The rate of inflation in 2020 was only 1.36%. It wasn’t long ago that economists were warning of the dangers of deflation, which would arguably be more detrimental to our economy than inflation. By contrast, from 1973 to 1981 there were six years when the annual rate of inflation was higher than 8%, and two years in a row, 1979 and 1980, when it exceeded 12%. In fact, there was only a single year between 1973 and 1981 when the annual rate of inflation was less than 6%. In that context, an average rate of inflation for the past two years in the neighborhood of 4% isn’t too alarming, especially considering the unprecedented supply chain disruptions that occurred during that time.