Last time I was still in diapers when inflation was so high:
It’s been four decades since we experienced rising prices at these rates, so it’s interesting to know how consumers feel about all of this.
My first read on this is people hate inflation.
Take a look at this chart of how people’s finances will be in the next 12 months:
Those who think that their financial situation will worsen next year, this is the highest in 42 years.
Economic development is booming. Wages are increasing. Accommodation prices are through the roof. And finding a job has never been easier.
So what gives?
Inflation.
More people are falling behind on a real basis. And since we love spending money in this country, high prices are staring at us every time we swipe those credit cards. Inflation is taking a psychological toll on consumer sentiment.
Everyone wants someone to be blamed when something like this happens.
With something as complex as the $23 trillion US economy it is never as simple as a variable.
As far as I’m concerned, here are the 4 biggest causes of high inflation:
1. Trillions of dollars in incentives. I know there are some investors who want to blame the Fed for everything but it’s really about fiscal policy more than monetary policy.
Governments around the world flooded systems with trillions of dollars to keep the global economy afloat during the pandemic. In the United States alone, we spent something like $7 trillion.
If you’re the political type you’ll probably blame (or defend) the current president. But the bulk of the spending came out of necessity and the first spending bill found bipartisan support. It was an emergency.
The option we’re currently dealing with is still pretty bad, but those trillions of dollars have entered the economy in a big way.
2. The pandemic is disrupting the supply chain. The New York Times wrote a story this week about the lack of garage doors:
Earlier some people had problem in getting these. Now it seems everyone has this problem. Prices have doubled or tripled in the past year. Lead times have increased from weeks to months. Homebuilders who once ordered garage doors several weeks before finishing a home are now ordering them before the foundation is poured.
“It took us 20 weeks to build a house,” said Adrian Foley, president and CEO of Brookfield Properties Development Group, which develops thousands of single-family homes annually in North America. It takes 20 weeks to get the set.”
It seems that some combination of steel, spray-foam insulation, and some lack of china has made it harder than ever to ship new garage doors.
New homes across the country are ready to move in but don’t have a garage door.
Everyone has dealt with this stuff whether it’s equipment or car parts or new cars or any other new place where the supply chain gets disrupted.
Labor shortage and Covid and rising demand for goods have wreaked havoc on all supply chains.
When demand remains high, a reduction in supply is a good recipe for higher prices.
3. Corporations are using it to their advantage. Corporations are dealing with high commodity prices, supply chain issues and rising wages, so inflation should affect their bottom line.
But let’s be honest – most corporations are doing just fine. Check out their margins (via Yardeney Research):
How do you explain rising margins if corporations are having such a hard time with inflation?
Chipotle CEO Brian Nicholl told analysts that the company is up 6% in prices this year and has seen little resistance from consumers:
beef and freight and some of these other things that continue Stay high, if we don’t see it going lower, we will have to take some additional price there. so it is Really the last thing we want to do, but we’re lucky we can pull it off. and we don’t see Resistance to date with the level we are currently at.
This poor corporation. They don’t want to raise prices, but consumers don’t care, so they have no choice but to raise them.
Listen, I don’t blame them. They are looking for their shareholders. But it’s not a tough choice for the CEO.
They like to raise prices when they can because there is no way they are going to lower prices even when inflation is low.
4. Consumers are spending a ton of money. This chart of retail sales is worth a look:
Just look at how high retail sales are compared to before the pandemic.
But Ben, it’s clearly all inflation. What happens if you adjust retailing to higher prices?
OK, here you go:
These numbers have seen a huge increase since the pandemic, even after adjusting for inflation.
Basically, we’re buying a ton of stuff.
The Wall Street Journal recently had a story about Chanel handbags. These are luxury items that sold for the ridiculously high price of $5,200 for a small purse in 2019 before the pandemic.
Sounds high but we all have our faults.
I guess it wasn’t enough because they raised prices three times last year alone. You can now pick up a Chanel Classic Flap Purse for the low, low price of $8,200.
They blame higher production and raw material costs for the rise in prices. come on,
They are charging a higher price because they can!
And consumers are happily paying:
“All the luxury industries are raising prices,” Michael Kors, Jimmy Choo and John Idol, chief executive officer of Versace owner Capri Holdings Ltd., recently told analysts. “We have seen that there is no consumer resistance to any price we take, and there will be more.”
At least they’re being honest I guess?
I have no problem blaming corporations for being greedy, but consumers are not innocent in all of this.
It helps people to fix their balance sheet. Families have paid off debt, seen their home prices rise, their 401k balance skyrocketed (as of this year) and are spending money like it’s going out of style.
That’s why we all complain about inflation but most of us happily keep paying the high price anyway.
Everyone is sad about inflation but we can’t help but pay a high price because if all we do really well in this country is consumption.
Michael and I discuss inflation and more on this week’s Animal Spirits:
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Further reading:
Now here’s what I’ve been reading lately:
