Happy Tuesday.
I try not to think about inflation too much. While it is painful to pay higher prices for many things at the store, we exaggerate the impacts when we read the announcements of the national figures. The Consumer Price Index* recently rose at a rate of 0.6% in the month of January 2022. If you measure the change over a whole year, from January of 2021 to January of 2022, the inflation rate of the CPI was 7.5%. The rate was 6% over the year measured by the PCE deflator* which has smaller weights for highly volatile food and energy prices.
The national inflation measures apply to a large random sample of people and what they are buying. If your buying habits are different from that group, then your personal inflation rate differs from the published one. If you are a smart, savvy shopper, you might do much better than the published indices. Energy and prices at the pump are clearly alarming. But do I really need to ride around alone in my large gas-hog SUV when I could trade it in on something that makes more sense when a gallon of gas costs as much as a gallon of Jack Daniels?
Another thing is that you buy some things whose prices are not changing. For example, if you have a fixed rate mortgage, your mortgage payment does not go up when interest rates or housing prices rise. If you buy other things on a long-term contract, those prices don't rise either. That's another way of saying that your CPI doesn't rise as much as the nation's.
Finally, is the issue of dollars and cents. Suppose you spend $3,000 per month on things whose prices rise. At 2% inflation, prices go up by $60. At 6% inflation, prices go up by $180. The difference of $120 might seem high but maybe not. It is not welcome but it won't exactly crush you.
One mitigating factor is how your income or your wages react to inflation. If you are able to negotiate a higher wage or if some of your income is automatically indexed to inflation, then the impact of the price change alone is less. If your income rises by 3% when prices are rising by 6%, your purchasing power falls by 3%. That's not appreciated, but a 3% reduction beats the 6% decline.
That's my story about inflation. Inflation isn't nice but maybe it is not as horrible as it seems.
*The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. An alternative measure of national prices is the deflator for personal consumption expenditures.
I think this is not temporary. Wage changes upward as well as affordable housing, cars, food, clothes and even JD. The final results of Ukrainian’s demise and the rest of the World’s attempt to stop Russia’s aggression will further exasperate the economies.
ReplyDeleteThanks Hoot. So far so good but you point out that there is plenty of room to believe this could go on for a while. Such a prolonged rise in inflation would bring plenty of misery. Maybe world leaders will figure that out and remove some of the fuel to the inflation fire.
DeleteDear LSD. Last week I suggested yer perspective on ‘flation is blasé . . . ambivalent even . . . . nonchalant, too . . . . ??? I’m partial to the Hoot-meister’s slant on ‘flation . . . not so “transitory” (per previous Biden ‘the eunuch’ word salad and Powell ‘the bowel’ oral discharge).
ReplyDeleteTry to find any poll that sez folkz aren’t concerned ‘bout ‘flation. Diesel fuel just hit $4.17 -- $3.005 year ago. Gas hit $4.17 -- $2.77 yer ago. Add to this goo the Ukraine/Ruskie fiasco and impend’n increase in petro yer gunna have the proverbial witches’ brew of Fed rate increases, trucker demonstrations/protests/strikes (in addition to those ‘app’n now in D.C./Maryland), supply-chain shortages ‘n empty shelves, ‘n double-digit increases in fude prices, etc. Ya know, too much moola (ala Bowel Powell print’n all that green back) chas’n too few goods/services is the mudder load ‘n birther of ‘flation. Stir that into the witches goo-brew ‘n ya got a hum-dinger of long-term ‘lfation, recession, or stag’flation.
Heck, you might need to forego JD fer less costly Boone’s Farm, Annie Green Springs, or Colt 45. ‘appy ‘our just a short walk to the frig for mighty fine cold chardonnay. Cheerz!
I reread my post and I didn't say that the inflation would be temporary or short. I did say that the actual impacts on people might be less than the scary numbers imply.
DeleteLarry I am sure you have seen the blurb 'when the other guy loses his job it is a recession, when you lose your job it is a depression'. Thing is you are in a good place in terms of having a good upbringing, getting a good education, having good jobs, and smart planning for retirement. I feel the same way, inflation is a PITA but it has not really changed my lifestyle. I still have my condo, boat, RV van, and Prius to drive around town. But it was a real eye opener for me this weekend when I got roped into pest control detail and killed an annoying hog on my brothers ranch. I field dressed it (with my brothers help) and sent it to a processor. Figuring out what everything costs it turns out for the first time in my memory the hog meat cost less than what I would have paid at the store, not to mention sometimes shortages in the store.
ReplyDeleteBut after talking to my stock broker I get the feeling this is just the start of much worse inflation than even under Carter. Sure the Russian oil cut off will raise prices all across the board but even worse is wheat from Russia and the Ukraine will simply not be on the market, same for sunflower oil; both big food stuffs in the developing world. And their prices are up way more than 7.5%
Even if you and I will go on with our lives mostly unchanged (I may just sail to the Keys instead of Cuba and down island) we are the exception. Here is a scary blurb to me:
"At the start of 2022, 64% of the U.S. population was living paycheck to paycheck, up from 61% in December and just shy of the high of 65% in 2020, according to a LendingClub report."
These peeps are not as lucky as you and I in terms of dealing with any level of inflation; not to mention supply issues. While I kinda hope you are right about this not being as bad as it looks my ‘spidey-sense’ tells me there will not be a happy ending.
My point in the post is that published inflation numbers exaggerate the actual impact on people -- especially if people make choices and substitutions. The index construction pretends people don't change their buying habits and their incomes don't index. I did say this one might be a bad one and I never said I thought it would be temporary or short. As far as poor people go, they will be disproportionately affected. That's part of the reason why we have so many programs to help the poor. Perhaps we will legislate even more help for them in this crisis.
DeleteVery good discussion. Enjoyed reading. Thanks, Larry, for your insightful comments.
ReplyDeleteThanks!
Delete