Inflation is rising. Who is getting carried away?
Inflation is on the minds of most Americans. We are all experiencing it, all in different ways, and some more than others. You might be like me, thinking about remodeling your kitchen, only to be interrupted by high lumber prices. Or maybe you’re like Rachel (one of the KWB Advisors) who had a great trip end with the upsetting discovery that an ice cream cone from McDonald’s now costs $2 instead of eighty-nine cents. You are really happy though if you are one of the many people who has sold a used car for as much or more than you paid for it. The Consumer Price Index was up 5.4% compared to June of 2020. It’s rapid, but it's our view that this rapid movement is not here to stay
We are now sitting in August of 2021. States are basically fully open, people are out of their homes, demanding products and services. Supply just hasn’t caught up. The high inflation today is pushed up and over our heads by a few areas thrown off by the pandemic. Looking at the above chart, if we removed all the “Pandemic idiosyncrasies” inflation is up just over 2%. What are the “idiosyncrasies?” They are used vehicles, energy, travel and hospitality, and new vehicles.
These areas saw a price decrease last year at the beginning of the pandemic and the various shutdowns. Inflation in June of 2020 was at 0.6%. Today, consumers and rental car companies had been buying used cars because new cars were in shortage. Air travel, hotel prices, and fuel are all in high demand with a shortage of labor to supply the demand. As jobs are filled, people go back to work, and supply chains catch up, prices are likely to level out in these areas.
Don’t get your hopes up though. Prices will likely not drop all the back to pre-pandemic levels. Labor costs and material costs are rising as some level of inflation is expected. Wages haven’t returned to where they were before the recession. In the meantime, inflation has been rising. Mostly in the 2% range, but wages have struggled to keep up, making affordability more difficult. The current increase in wages is simply overdue.
If the last year and a half have taught us anything, it's that there is no such thing as normal. Everything is in a constant state of flux, from inflation to the stock market. Inflation is always changing based on supply, demand, and wages. Sure, the Fed says they want to see an average 2% rate of inflation as a target. We’ve been in the ballpark a lot, but not consistently. A swing like we have seen this year in inflation is “normal though” if you consider what 2020 and 2021 have brought us. If you are thinking about remodeling, traveling, or buying a car, at this point it may be best to wait if you can. As always, if you want to know how inflation may be impacting your financial plan, reach out to KWB and visit your financial advisor.
As a final thought, you might be thinking that inflation isn’t really impacting you at this point. You may not be remodeling your home or buying a new one, or buying a car, or traveling. But once your 2020 surplus of toilet paper runs out, expect to be paying more for your next 30 pack of rolls, compared to what you previously paid. In addition, many food companies you see in your local grocery store are participating in something called “shrinkflation.” Meaning they have put a smaller quantity of product in the original box and left the price unchanged. Yes, it's sneaky! But companies like Costco, Lay’s, and other familiar brands are all taking part.
~ Quentin Bubb
- Less is more: 'Shrinkflation' hits grocery stores as companies reduce product sizes amid rising costs, www.foxbusiness.com
- US CPI Inflation, theovershoot.co