Inflation in America – Part I: Five signs of inflation, from rising prices, to shrinking candy bars, to increased fees
How to avoid an inflation-induced household budget crisis that may be creeping up on you now
Inflation is unfamiliar to Americans who are not old enough to remember the horrors of disco. Not since the 1970s has America seen the kind of price inflation that is rampant today, in all its many forms. In the first part of our inflation primer Inflation in America we give you the basics. Like a frog heating slowly in a pot of water, if you’re not aware of how inflation works its corrosive effects on your budget you may find yourself financially cooked.For over a decade you have seen high, often double-digit, annual inflation rates in college tuitions, housing prices, and health insurance. More recently you’ve witnessed gasoline, heating oil, natural gas, and food price inflation. Soon you will see prices go up at the local Made-in-China big box mart, thanks to rising wage rates and a strengthening currency in China.
The primary cause of our inflation is the depreciating dollar, now off more than 50% against the euro over the past several years. We will go into that sorry process in Part II of our series. In this part we reveal stealth inflation and its impact on the quality of your life and your household budget, and what you can do to protect yourself.
Inflation: Level versus rate, what is versus what shall be
Inflation Sign #1: High and rising prices. Inflation is not only higher prices but high and rapidly rising prices. Understanding the difference is key to understanding the nature and process of inflation. A recent Harper’s Magazine article by Kevin Phillips “Numbers Racket” ($ubscription) argues that the true annual inflation rate in the first quarter of 2008 was closer to 12% than the official 4% reported as the government’s consumer price index (CPI-U). Twelve percent is a very high inflation rate by any standard, and when it comes to inflation the rate of change in prices is more important than a high versus low but stable price level. Here’s why.
In the two recessions of the 1970s, consumer credit growth peaked about six months before the CPI. Consumer credit declined through the recession and inflation after. During the most recent recession in 2001 both consumer credit and CPI inflation increased in tandem during and declined after the recession. At this writing both inflation and consumer credit are moderating. However, during the 2001 period the US dollar was not weak and in a period of structural readjustment as it has been since 2001. Consumer credit is likely moderating due to the credit crunch that is spreading across the financial system while a weakening dollar continues to push energy prices up and inflation through the economy.
As goods and services prices are rising the US economy is slowing. Jobs are beginning to dry up. Competition for the remaining jobs prevents workers from to demanding salary increases. Rising household expenses and stagnant wages result in a household cash flow squeeze.The relief valve? For consumers with the best credit the result of more borrowing to cover expenses is increased debt and reduced savings. With prices of goods and services rising while incomes stay flat, households attempt to make up the difference in the loss of purchasing power by borrowing more to purchase the same quantity and quality of goods and services as in the past – to maintain the material quality of life to which they have become accustomed. Households drain savings and increase household debt as inflation cuts into household cash flow.
There is no painless way to cope with inflation and get your budget back on track. The steps you can take are much like those you’d take if you decided to take a pay cut and economize. What makes adaptation to inflation tricky is that your income may be flat or even rising – but not as fast as price inflation is rising around you.
- Take public transportation: Grab a train or bus when you can
- Carpool to work with friends: It’s more fun than you think
- Clip joint avoidance: Set a cut-off price for entrees at trendy, over-priced restaurants
- Eat out less, cook at home more: Home cooked food is better for you anyway
Inflation’s impact on business: Your local restaurant
In spite of these cost reductions, eventually your local restaurant is forced to raise prices to cover rising input costs. Unit volumes decrease because customers’ incomes are not rising to cover the added cost of items on the menu. Customers will also notice the cheaper ingredients and the restaurant’s food quality reputation will suffer. Management tries to lower fixed expenses (versus per plate of food unit costs) by reducing staff. Customers experience this as slowness and crankiness among the remaining overburdened wait staff.
If your wait person is cranky and unresponsive, count how many tables they are covering before passing judgment. These days it’s probably too many.
This is how a business goes out of business in an inflationary recession. In an inflationary recession the most profitable operations, if they have maintained a large cash cushion and especially if they hedged inflation in their cash account with sound investments, can survive by letting inflation grind down competing businesses with weaker balance sheets by forcing them to raise prices and reduce product and service quality. By not raising prices and taking the profit hit, the stronger competing company steals the weaker company’s customers. If they have enough cash to keep it up, it’s a matter of time before the stronger business has enough of the weaker business’s customers that the weaker business fails.
Rising prices is inflation sign #1. But four-dollar gasoline and $25 entrees at a restaurant where they were $15 two years ago is only one sign of inflation. Watch for these as well.
Inflation Sign #2: Smaller sizes, volumes and portions
Food makers are starting to reduce the size of items like candy bars and cutting back on the number of chips in a bag of chips. Expect food that fits into a box or a bag to decline in volume. Notice that bag of corn chips that used to be full is now one quarter empty, that jug of laundry detergent that used to be good for 30 loads will now do 24, and so on.
Inflation Sign #3: Substitution of lower cost and quality ingredients
This inflation sign is the most subtle of all. Unless you have been going to the same store or restaurant for a long period of time you won’t not notice the change. Using cheap versus expensive tequila in your margarita, for example, or regular antibiotics fed chicken versus organic chicken like it says on the menu.
Inflation Sign #4: Poor service due to cutbacks in personnel
Long lines can be a sign of inflation. As businesses cut service staff to reduce personnel costs, waiting times rise. Over time you may notice it takes longer to find someone to help you at the local Home Depot, or you are waiting longer on the phone to speak with technical support, or the experts you talk to turn out to not be so expert as you are put through layers of less expensive and lesser trained personnel before you get to talk to the one high cost expert who actually knows what they are talking about.
Inflation Sign #5: Fees, fees, fees
As costs rise, towed behind many once reasonably and simply priced products or services you will find a giant load of new fees. Checked out your bank statement lately? Your cable bill? Your cell phone bill? It pays to look at these carefully every month as most service providers are not required by consumer law to notify you when a new fee is added. You may be surprised to find many fees large and small hitched up to a service that was sold to you at a fair starting price. Look at them now.
Inflation is more than higher prices, it is also a lower quantity and quality of goods and services for the same price, lower quality services, and new fees.
What is causing inflation? The falling dollar. Our the second installment of our Inflation in America series we explain how the weakening dollar is creating cost-push inflation. In our third part of the series we address the question, Will the dollar appreciate and US inflation abate? Only structural change will cause the dollar to strengthen and end the weakening dollar inflation cycle.
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