Written by Rodney Johnson March 28, 2022
Prices Skyrocket? You Still Have To Put Food On The Table!
Economic textbooks are full of equations and theories that have no place in the real world. They describe consumers as “rational men” who make clear-eyed mathematical decisions when choosing what to buy. Clearly, the textbook writers never visited Walmart on Black Friday. But we know why things like the “rational man theory” exist. Without these theories, we’d be throwing up our hands, trying to figure out what’s going on in the economy. If everyone is irrational, then there’s no way to figure out what might happen next.
At a time when prices surge and people are losing their jobs, nationwide averages to determine an individual's needs aren't going to cut it anymore.
The U.S. Bureau of Labor Statistics (BLS) suffers from a similar flaw. Instead of assuming a character trait that doesn’t describe most of the population, the BLS uses averages to explain the economy—averages so broad that they become all but irrelevant. The current inflation number, 7.9%, sounds huge, but it’s still covering up big problems for everyday consumers. The problem is that we don’t buy everything all at one time. To estimate the effects of inflation, we should focus on the things that everyone needs. Unfortunately, these are the exact items that the government excludes in their core inflationary report.
Over the past year, the price of new cars jumped 12.4% while the price of used cars increased 41.2%. If you needed a new set of wheels, this likely came as a shock. If you didn’t need a new ride, then you probably didn’t care. BLS estimates show that new car and used car purchases represent 4.09% and 4.17% of the average consumer’s budget, which is silly. Not many consumers buy both a new and used car in the same year. But the BLS isn’t describing what happens to any particular real person, the bureau is describing what happens to the average person. And therein lies the problem. Much like the children of Lake Wobegon, where all of the children are above average, every consumer has his or her own set of financial circumstances. None of us individually are average.
To measure national inflation accurately, the BLS measure has to include such things as car purchases, even though most people don’t buy a car every year. However, everyone purchases certain things with incredible regularity. Everyone buys food and energy, and demand doesn’t change much with price which, in the words of economists, makes our demand inelastic.
It would be unusual for people to purchase more food or energy than they need, although they might buy higher-quality items when prices are low. Typically, these aren’t luxury goods, they’re the building blocks of daily life. When prices march higher, we still need food and energy, along with shelter and medical services, to live. These are the inflation drivers for individual consumers, because even when gasoline jumps to more than $5 per gallon, we still have to drive to work. We can put off buying a car. We can’t put off driving and eating.
And yet, the BLS and even the Federal Reserve exclude food and energy when estimating core inflation. In the late 2000s, Barry Ritholtz wrote that this is like “reporting inflation minus inflation.”
There’s a reason that consumers feel lousy right now. They can’t avoid buying things on which prices have jumped dramatically over the last year. We can shake our heads at the prices for cars and homes, but we still have to fill up our tanks and grocery carts. At a time when our investment accounts are taking a hit, the relentlessly rising prices are giving everyone a bit of financial distress. If you are one of these many individuals that are in financial distress, getting in touch with a financial advisor is the key to relief. Consulting with an advisor is more imperative than ever, and it couldn't be any simpler to get into contact with one.
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.