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Is inflation spinning out of control? Government number crunchers and policymakers cite numbers that don't seem terrible. But anyone who pays the bills for a household or a company knows that the cost of living or running a business is becoming more painful.
We expect the Consumer Price Index (CPI) to rise 4% this year. That's about the same pace as in 2007 and about what we've seen so far in 2008.
Why does if feel much worse than that? One reason is that incomes are struggling to keep up. Wages are increasing just over 3% before inflation. And personal income, which includes wages and salaries as well as bonuses, Social Security payments, dividends, interest income and the like, is up only a tad more than prices.
And the costs of food and energy are soaring. About half of the rise in the CPI this year comes from them, with food prices up about 5% and gasoline up 20% so far this year. Paul Kasriel, an economist with Northern Trust Corp., says, "Things that people buy often are going up."
Excluding food and energy, expect a 2.3% jump in the core CPI, which is a gauge of less volatile prices. Costs of the 75% of household expenditures, excluding food and energy, are rising more slowly and in many cases are falling for a range of goods such as computers, new cars, TVs and apparel. Rents, which are 30% of the total CPI and are used to approximate housing costs for homeowners, are rising slowly.
When will inflation subside? Possibly not for several quarters. But this isn't a repeat of 1973-1981 when the CPI rose 9% a year on average as automatic wage hikes became part of union contracts and spiraled upward. Janet Yellen, president of the Federal Reserve Bank of San Francisco, said in a recent speech, "I see little reason to believe that we have entered, or are about to enter, such a period of stagflation."
The fact is many firms can't boost prices. That's certainly true for homebuilders, automakers, appliance makers, furniture stores, computer makers and retailers. Others are raising prices but not enough to fully offset higher costs. They include delivery services and airlines, despite fuel surcharges and higher fares. One survey shows that 63% of companies in the S&P 500 have raised prices from a year ago. But only 26% say that they've been able to raise prices enough to cover their rising costs
We expect oil prices to moderate later this year. If oil drops to $100 a barrel and gasoline to $3 a gallon, that could break the cycle of rapidly rising energy prices. And the Federal Reserve is cooling inflation expectations, convincing financial markets that it can successfully pilot the economy between the shoals of no growth and high inflation, tweaking interest rates as needed.
Meanwhile, more of the same on inflation spells sub par economic growth, with the gross domestic product growing at a meager 1.5% to 2% annual rate through most of 2009. Diane Swonk, chief economist with Mesirow Financial Services, says, "It's bad news if you're a consumer." With real disposable income likely to be stagnant for a while, households won't spend as much, resulting in a slow, prolonged recovery from the economic downturn.
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POSTED BY: Vera M Salmons (May 20, 2008 11:14 AM)
we are 76 years old.worked all are lives.paid taxes.& now we are heading for foreclosure. Wachovia bank really hurt us bad and we can no longer pay our mtg of 1.14350 plus 650.00 taxes every 3 months plus insurance.they way over appraised this tiny home with no frontage,we can only get in threw driveway.I have begged them to just lower the payment to 800.00 they will not budge. I have maxed out everything to keep up. but I can no longer do it. so we at are age will be homeless. Our mortgage is 172.000 and is only worth 70,000 at the most
POSTED BY: Joe Honick (May 20, 2008 11:30 AM)
It ia grossly unfair now to peddle the idea of something encouraging when the media (yours included) have sold the public into an attitude of discouragement. Until the consumer beliefs are modified, housing markets and all the rest will either remain stagnant or drop further. A little even unprofessional observations in major supermarkets will tell you how they are struggling to adjust. Worst problem is that much of this could have been avoided if the lust of the international finance world had not been so disgraceful especially in the mortgage sector.
POSTED BY: Blair Dehuff (May 20, 2008 03:14 PM)
Jerome,
Exactly how are SSOC payments, interest income, dividends and the like "up a tad bit MORE than prices"? Interest income has been slashed to 2%, bond yields are way down, and social security payments absolutely never keep pace with inflation. Obviously, you don't live on fixed imcome.
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