FORECASTS & TRENDS E-LETTER
by Spencer Wright
March 26, 2024

Prices Go Up!

IN THIS ISSUE:

1. It Isn’t Your Imagination

2. How Much Have Prices Risen?

3. The Vise of Fighting Inflation and High Costs

4. The Impact and What Happens Next

It Isn’t Your Imagination

It isn’t your imagination. Virtually everything costs more than it did three years ago. And with inflation stubborn at about 5%, wages have failed to keep up. Add in decades high interest rates and the average consumer is weaving around like a punch-drunk boxer on his way toward the canvas.

It turns out that shutting down the economy for a year and then spending borrowed trillions to keep it all from sliding into the toilet is economically sub-optimal. What are the odds? A course of action so ill-conceived and poorly implemented that it required the full political prowess of two administrations and both parties.

So, three years on, the dollar in your pocket buys considerably less than it did. The news isn’t all bad. The interest on savings (what there is of it) is much higher than at any time in the past 15 years. Of course, and of greater interest to consumers, so is the interest on credit cards and mortgages.

Consider the following infographic:

Inflation and food prices are right at the top. They are far more important to everyday folks than tax rates or a lack of good jobs, and way more important than the stability of the banking system or stock market volatility. Think about that for a minute. People are pinched, and there is no denying it.

How Much Have Prices Risen?

That is a good question. On average, prices are higher for goods and services by about 18% over the last three years. The following infographic is from last year and tracks the year over year change in the price of the goods shown. This listing is by no means comprehensive, but it does touch on the main areas that impact the vast majority of people.

As you can see it isn’t completely bad news. Too bad you can’t eat your smartphone. Food and energy items show the biggest increases. I guess it is a good thing that the Fed omits these ‘volatile’ elements from the inflation calculations.

Percentages are one thing, but what does all this mean in dollar terms?

From TIPP Insights, “In short, prices have increased by 17.3%, while real wages have declined by 2.0%, meaning Americans have taken a 2.0% pay cut under the current administration. To put it differently, people now need 19.3% more income than they had in January 2021 to maintain their living standards. According to some estimates, Americans need an extra $11,400 a year to make ends meet.”

That is a brutal assessment.

But as inflation is tamed by the Fed these prices will come back down, right? Well, no. Meet the inflated price, same as the new price.

The Vise of Fighting Inflation and High Costs

That’s right. Assuming that the Fed is successful in fighting inflation, and in time they likely will be, the cost of goods and services that have been driven up over the past three years by that inflation will not come back down. At least, not back to pre-inflation (pre-2021) prices.

Why? Because consumers are trapped in the vise of higher interest rates (needed to quell inflation) and inflated prices. The prices will not come back down once the Fed returns rates to around 2% (their stated long-term objective). Small businesses and large corporations that provide those goods and services have experienced higher materials costs, higher borrowing costs and a dip in demand in many cases.

There are many factors at work, and I am oversimplifying it, but you can boil it down to profit margins. To make money past increased material and borrowing costs, small businesses and corporations must charge more. It is the most basic tenet of economics that all costs are passed along. A maxim of which the Federal Government seems eternally clueless.

Even for the vast majority who must economize to some degree, the pressures of a no-frills existence are palpable. Consider this graphic that shows the increase of household costs since April 2021.

But, if you wanted to leave your home, the price of new and used cars has moderated somewhat. The cost of insurance, however, has not. From Yahoo Finance:

“New data out this week showed auto insurance costs rose 20.6% from the prior year in February, matching January's increase as the most since December 1976, when costs rose 22.4% over the prior year. On an annual basis, motor vehicle insurance costs rose 17.4% in 2023, the most since a 28.7% increase in 1976, according to data from the BLS.”

The Fed’s mantra of ‘Higher for Longer’ doesn’t just apply to interest rates, unfortunately.

The Impact and What Happens Next

Many are struggling. The cost of necessities and big-ticket items like higher education, transport and insurance remain on the rise. Thanks to inflation, wage growth has not kept pace. Where are many Americans finding the excess $11,400 per year they need just to get by? Credit cards, of course. Household revolving credit debt is through the roof. The following info graphic says it all.

And, since rates are at 18-year highs to fight inflation, the interest rate on credit cards is considerably higher as well. Faced with high prices, many are drowning in high interest debt just to get by. Fed Chairman Powell mentions in every statement that the Fed is aware of the impact they have on American families and communities. That is likely little comfort to all those struggling.

Rates will come down, but as discussed, prices will not. As inflation abates, that should allow workers to capture more wage growth. But will it be enough to stabilize those households dealing with the crush of higher prices? That is currently unknowable.

There hasn’t been a recession, yet. The Fed often reminds us that inflation is far worse than a recession. And in that, the Fed is absolutely right.

Thanks for reading,

 

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