Last week, the Bureau of Labor Statistics (BLS) announced that the Consumer Price Index summary rose 8.3% in April compared to last year. Year-over-year inflation rates have exceeded 5% for more than a year and exceeded 8% for the past three months.
The Fed promised to act aggressively, raising interest rates four to six times this year, then three to five times next year, hoping to stamp out inflation like Fed Chairman Paul Volcker back in the early 1980’s.
In the present day, inflation is “lack of supply” driven. Prices are high because the things that people want are no longer readily available. The lockdowns of the pandemic changed purchasing patterns – more goods, less services, at the very moment when COVID-19 shutdowns in China and Southeast Asia disrupted manufacturing. The late February Russian invasion of Ukraine threw two other markets into disarray – fuel and food.
We’re skeptical that raising rates will have any effect on the current components of inflation other than tamping down “asset price” inflation in housing and stock market investments. Raising rates will not end the war in Ukraine or reopen factories in China. Fuel, food and goods prices will remain elevated until supply catches up with demand.
How does inflation affect you personally?
Consider these categories of economic class:
* Wealthy – top 1 % of income exceeding $500K/year, $11 million or more in net worth
* Well-off – top 10-1% of income $200K-$500/year, $1.2-$11 million NW
* Middle class – top 30-11% of income $105-$200K/year, $300K-1.2 million NW
* Getting by – top 50-31% of income $67K-$105K, $120K-300K NW
* Low income – bottom 50% of income $0-67K, less than $120K in NW
Federal Reserve Survey of Consumer Finances
Determine your economic class, then consider whether inflation in the following components is annoying or painful to you personally.
* Food – Studies have found that Whole Foods charges about 30% more for the same shopping cart of groceries compared to Walmart. The Whole Food shopper is more likely to be in Middle Class, Well-off or Wealthy category, and less likely to care about price increases. Low income families may well scrimp on fresh fruit and produce to keep their food budget under control.
* Energy – Fuel prices jumped 66.7% over the last year. Retail gasoline prices increased 127% from a low of $1.94 in April 2020 to the recent high, including gains of 29% just since the start of the year. For a larger car, pickup or SUV, a fill-up today might cost $20 more than three months ago.
For Well-off and Wealthy households, the extra cost is annoying. Low income families may have to work an extra two hours just to afford the gas to get to work.
* Imported Goods – Non-fuel imported goods prices rose 7.5% over the past 12 months compared to 3.8% gains in the previous year.
* Cars (new and used) – Back in 2009 amid a deep recession, people could buy cars for 20% less than list price. Last summer with supply constraints on chips slowing production, the price on the window was the price you paid. With chips still scarce and demand still growing, drivers may pay $3,000-$6,000 over list price for new cars and wait 12 weeks or more for delivery.
Used car prices gained 14.0% year over year. When the chip shortages resolve in 2023, car prices should stabilize at higher levels. Buyers who can wait until next year should see the buyer’s premium go away.
* Wages – After spiking to nearly 15% in the first months of the pandemic, the U.S. unemployment rate fell to 3.6% recently. The Bureau of Labor Statistics reports 11.3 million job openings in the U.S. versus 5.9 million unemployed. Combine lots of open jobs with a limited hiring pool, and wages will surge.
How do businesses attract talent? By paying more. The U.S. minimum wage officially sits at $7.25/hr, but no business can attract skilled labor for less than $15-$20/hr. The number one complaint of business owners right now is how hard it is to get qualified workers at any price.
* Housing (purchases and rentals) – Housing prices peaked in 2006, fell 25% in the Great Recession, and from that level doubled coming into 2019. With pandemic-era interest rates near zero, housing inventory low, and building materials held up in supply chain snags, housing prices rose — then kept rising: The U.S. median home price exceeded $400,000 for the first time ever.
On the rental side, economists anticipated an eviction crisis that never materialized. Instead, vacancy rates are at the lowest levels since 1984. Increasing rates make mortgages less affordable, which cools off demand. However, higher rates also make building more expensive, so new supply may be constrained.
Housing prices may simply stabilize at higher levels. Housing inflation has increased the net worth of long time home owners while shutting out first time buyers.
* Stocks – Through the five years ending December 2021, the S&P 500 gained 113%, which is well above historic gains but not surprising given low interest rates in 2020 and 2021. Now that interest rates are rising, the S&P 500 is down nearly 16% on the year, but still up 73% over the previous 5 years. The wealthiest 10% of US households own 89% of the value of stocks.
Inflation pain correlates with income
Over the past 20 years, real household income for the top quintile of U.S. families increased 74% for a net gain of $107,514 in current dollars.
Real household income for the lowest quintile of families increased 55% for a net gain of $14,011 in current dollars (Bureau of Labor Statistics.)
Wealthy and Well-off families are well equipped to ride out the current inflationary environment, especially considering housing and stock market gains. Middle class families should be OK.
The Getting-by and Low-income families have the most to fear from inflation, but will also bear the brunt of job losses if the Federal Reserve rate increases drive the US economy into recession.