Here are the last 7 annual inflation impressions per month:
- March 8.5%
- April 8.3%
- May 8.6%
- June 9.1%
- July 8.5%
- August 8.3%
- September 8.2%
That’s 7 consecutive months of inflation above 8%. This hadn’t happened since the early 1980s.
So what gives?
The Fed has hiked rates aggressively, supply chains are improving, oil prices have fallen by a third and gasoline prices are off their highs.
I could walk you through each individual component of the inflation calculation, but there are economics buffs out there who can explain the intricacies of landlord equivalent rent much better than I can.
Let me offer two simple explanations without having to go into too much detail of economic data calculations.
(1) Everyone got rich during the pandemic.
Ok, maybe not everybody but the royal us is much richer. Collectively, American households have become much richer during the pandemic.
US household net worth heading into 2020 was just under $110 trillion.
By the end of the second quarter, net worth was over $135 trillion, having hit an all-time high of nearly $142 trillion this year.
From the end of the first quarter of 2020 to the first quarter of 2022, the net worth of Americans increased by 37%, by far the largest increase on record since the Fed began tracking this data in 1989.
This was from the Covid low to the post-pandemic peak, but even if we start from pre-pandemic levels, the 30% increase is by far the largest 2-year increase in net worth ever before this time.
And for once, it’s not just the top 10% or 1% who benefit.
Take a look at how the net worth of the bottom 50% has changed over time:
From 1989 to the 2007 pre-GFC peak, the net worth of the bottom 50% fell from $773 billion to $1.4 trillion.
So, in just under 20 years, the net worth of this group has increased by more than $620 billion.
The bottom 50% have been devastated by the financial crisis and housing crash, with the total net worth of this group dropping to $190 billion.
By the end of 2019, it was back up to nearly $2 trillion.
It’s now $4.4 trillion.
Thus, the net worth of the bottom 50% has increased by $2.4 trillion since the start of the pandemic in early 2020, which means it has more than doubled in less than 3 years.
This group of households tends to spend a higher percentage of their income than those with more financial assets, so it should come as no surprise that people continue to spend in the face of higher inflation.
The American consumer has probably never been more prepared for high inflation (and potential recession) than they were in this time of rising prices.
Nobody likes inflation but us to like spend money in this country. So most people have just decided to complain, but continue to spend despite the pain of higher prices.
(2) Companies are doing very well with inflation.
Inflation was caused by a combination of the pandemic, government spending in response to Covid, supply chain issues, consumer spending, Russia invading Ukraine, and the Fed.
I may have missed something, but it gets you closer to the root causes.
But ultimately, higher prices come from companies raising prices.
Corporations did not cause inflation, but they are sure to profit from it.
Just look at the operating profit margins of S&P 500 companies:
They rose even as inflation soared.
So you’ll hear CEOs complaining about higher input costs, higher salaries, labor shortages and supply chain issues, but don’t shed a tear for them.
They responded by raising prices to such an extent that their margins reached all-time highs.
As households have been forced to pay higher prices at the pump and at the grocery store, businesses have been able to pass on cost increases to consumers.
Again, inflation was not caused by corporations and business owners. And many companies have certainly been affected by rising input costs.
But while workers are blamed for demanding higher wages and the government is blamed for a spending spree and the Fed is blamed for keeping rates low for too long, companies have somehow avoided the comeback stick despite record profit margins.
And do you think these companies will lower their prices as their costs come down?
I’m not holding my breath.
The Fed could very well put an end to these trends by throwing us into a recession.
But as long as businesses pass cost increases on to consumers and consumers continue to cut back on their savings, inflation may hold steady for some time.
Michael and I shared some thoughts on the persistence of high inflation in this week’s Animal Spirits video:
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Further reading:
Here’s what I’ve read lately:
- What if there is no safe withdrawal rate? (Freedom Day)
- Telling the story of how the stock market usually goes up (TKer)
- 17 years of blogging (Abnormal Returns)
- The only real reference (Prime Cuts)
- You may want to retire soon if you have a pension (Dollars and Data)
- Inside Ryan Reynolds and Rob McElhenney’s Wrexham Gambit (GQ)
#isnt #inflation #falling