Inflation… A Lot of It Is in Your Head
Inflation has caused many Americans to become concerned as the price of simple items like eggs can skyrocket at any time. Read how this affects our economy.
The U.S. Bureau of Labor Statistics recently released the inflation numbers for January. Overall, the Consumer Price Index grew by 6.4% over the last year and by 0.5% over just the past month. Electricity prices were up 11.9% for the year, while new car prices increased 5.8% and shelter cost 7.9% more. These are the types of things that Fed Chair Jay Powell and the rest of the central bankers consider when they contemplate raising interest rates again. They want to discourage spending with borrowed money so as to cool off the economy, but they also have another goal. They need us to think that prices will moderate, and that’s harder to do.
As long as consumers expect price increases to be mild, then they will push back against retailers who stray too far afield, which they do by going to competitors or buying substitute goods. In this situation, consumers have the pricing power and use it to keep retailers in line. The retailers then use the same power to keep wholesalers in line. Along the way, employers tell workers they can’t increase their pay too much because they can’t charge the higher prices necessary to afford the wage increases.
This keeps inflation tame… until it doesn’t.
If consumers expect prices to walk higher over the next year or two, then they are motivated to buy goods today before they cost more, especially if the consumers aren’t getting higher wages. But if too many, or even most, consumers have this view, then it becomes self-fulfilling. The more people who buy early, the greater the demand, which leads to higher prices.
The New York Federal Reserve just reported that consumers expect prices to rise by 5% this year, a big number, while household income gains fell from 4.6% to 3.3%, the biggest one-month drop in the history of that series. This is exactly what Chair Powell and the other bankers want to avoid. They are raising rates to show us how serious they are about fighting inflation, and they’re willing to push the economy into a recession if necessary and drive up unemployment to prove it.
For more information on the Fed, watch this video from Rodney Johnson
Once inflation is expected, it’s very hard to dislodge, but it can be done. Last year, the cost of eggs became an Internet meme, as the wholesale price of eggs shot up from $1.50 to $4.65. The chicken industry had to cull 58 million chickens because of the avian flu, but we kept buying eggs. Consistent demand and falling supply led to the pricing imbalance, but now that’s over. Ten days ago, the wholesale price of eggs had fallen to $2.01, but the retail price hadn’t budged. This morning, I paid $4.99 for a dozen, 150% over the wholesale price. If we want prices to reflect more supply quickly, then as consumers we need to be diligent in taking our business to the low-cost provider. Otherwise, inflation will be here to stay and our decelerating income growth will lead to a falling standard of living.
Written by Rodney Johnson The Rodney Johnson Report
Read more about the impact of rising interest rates on the economy: The Fed is from Mars, Investors are from Venus
To see more CRA blog articles, click here.