30-YEAR HIGH: Inflation Hammers American Family Budgets

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American families need no reminder that prices are going up, fast. They can see it every time they go to the grocery store, pump gas, pay the rent, or see the doctor. The latest measure of consumer price inflation has just been released, and it came in at a three-decade high of 6.2%. The speed of price increases being felt by Americans under the Biden administration is hurting families. The Wall Street Journal reports:

Federal Reserve officials are closely watching inflation measures to gauge whether the recent jump in prices will be temporary or lasting. One such factor is consumer expectations of future inflation, which can prove self-fulfilling as households are more likely to demand higher wages and accept higher prices in anticipation of higher future price growth.

Consumers’ median inflation expectation for three years from now stayed at 4.2% in October, the same as in September, according to a survey by the New York Fed. That level is the highest since the survey began in 2013.

Unusually high demand—boosted by a long stretch of government stimulus and an improving job market—is a crucial factor driving higher inflation.

Consumer spending increased at an annual rate of 1.6% in the third quarter, a sharp slowdown from a 12% increase in the prior quarter. However, much of that deceleration was due to scarcity of new cars and other durable goods. Consumer spending on services last quarter climbed at the brisk annual rate of 7.9%.

Covid-19 continues to be a wild-card factor. The outbreak of the Delta variant put downward pressure at the end of the summer on prices for travel, recreation and other services that involve close interaction. Spending on services has bounced back in recent weeks as coronavirus infections fell, which could put further upward pressure on prices.

Companies are struggling to get materials and are delaying orders as elevated demand for goods due to pandemic spending habits has collided with transportation bottlenecks, production disruptions from Covid-19 and labor shortages. The most prominent example is a shortage of semiconductors that has hamstrung auto production. Limited supply of new autos has driven up prices for both new and used vehicles.

The chip shortage, which has also affected other industries, has worsened because of shutdowns of factories and ports in Asia in response to Covid-19 outbreaks.

Supply disruptions go far beyond the semiconductor shortage, creating scarcity for a range of materials affecting companies throughout the chain of production. A separate shortage of available workers is also affecting inflation and the overall economy, said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.

“The bigger picture is we’re likely to see inflation climb higher,” she said. “Things are going to get worse before they get better.”

Many companies are passing on higher costs to consumers. In October some 53% of small businesses raised prices, on net—a level last seen in the early 1980s—according to the National Federation of Independent Business, a trade association.

The shortage of workers to meet consumer demand is also putting upward pressure on wages, pushing companies to raise prices to offset higher labor costs. The sharp uptick in restaurant prices during the past few months is a sign of this pass-through from wages into higher prices, economists say. That dynamic is increasingly showing up in other sectors.

Higher food and energy prices—driven up by pandemic-related production problems as well as by weather and geopolitical factors—are also adding to the upward pressure on inflation, said Richard F. Moody, chief economist at Regions Financial Corp.

“All these things are being rolled into prices we pay at the grocery store,” he said.

The relentless and rapid rise in prices throughout the economy has left companies scrambling to keep up.

Action Line: If you are struggling to keep up with inflation, and still want to save for retirement, it may be time to put some FIRE! in your budget.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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