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Inflation… A Lot of It Is in Your Head Thumbnail

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.

Inflation changes many things about the economy, read how in this article.


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.

Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. The information presented is not to be considered advice you can or should act upon for investment, tax or estate planning purposes without consulting with a professional to discuss your own set of unique circumstances. This article is designed to provide you with information regarding investing and planning for or during retirement.  You must seek professional advice separately before acting on any items discussed in this article. The views expressed are those of Rodney Johnson and not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates. Rodney Johnson is not affiliated with Mutual Advisors, LLC or California Retirement Advisors.