Voting Our Dollars

Kyle McIntosh

THE BUREAU OF LABOR Statistics reported last week that consumer prices in August were up 5.3% from a year earlier. This means that, on average, we’re paying $105 for a basket of goods and services that cost us $100 a year ago. Investors and analysts are worried that higher inflation may be here to stay.

My contention: Inflation will prove to be temporary and the Federal Reserve won’t have to increase interest rates to slow consumer prices. In making this assessment, I’m focused on American consumerism and the fact that we’re bargain hunters at heart. We’ve accepted upticks in highly valued and necessary items over the past year. But as deal seekers, I can’t see us accepting steep price hikes over the long haul.

Let’s start with fast food. From June to August, fast food prices increased at an annualized rate of 9.7%, as restaurants passed along the higher cost of labor and ingredients to their customers. While my family loves its Chipotle, we’ll certainly dial back our visits if burrito bowl prices continue to spike. Another alternative is we’d keep up the same number of visits but buy smaller quantities—something we should already be doing for health purposes. If others make similar changes to their behavior, fast food restaurants will see that pushing up prices will ultimately lead to sales declines, and that should prompt them to slow price increases.

Another recent driver of inflation has been the cost of automobiles. August’s vehicle prices were 32% above those seen a year earlier. For folks who really need a car, I can see the rationale in paying up. But the rest of us will be inclined to delay making car purchases until competitive pricing returns. Dealers have conditioned us to expect attractive offers. Once supply chains are back on track, I expect dealers will return to competing on price with “manager specials” and “employee pricing.”

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Roboticus Aquarius
Roboticus Aquarius
1 year ago

I think inflation will be a modest concern, and as we get really worried it will fade away.

It seems likely we will see a modest increase in core inflation as wages work their way through the economy. This impact may be far less than alarmists suggest, but I think it is real and my sense is that it will have an impact of at least a quarter percent. Just my guess.

So far, most inflation is in pandemic-influenced segments of the economy, and that will not only slow considerably at some point, but it is likely to recede. Some prices may prove ‘sticky’ however, so this may cause some short term inflation that hangs around for a while.

More importantly, industry analysts seem almost unanimous that supply chain issues will be with us in 2022 and 2023 at the least, with a return to more ‘normal’ shipping rates and conditions expected no sooner than 2024.

FWIW. So many things can happen, it’s nice that my retirement does not depend on my forecasting ability. Buy and hold makes it simple, and simple is sophisticated.

1 year ago

I agree that the resolution of supply chain issues will help to keep inflation in check. However, reduced demand will not result in lower prices for businesses with higher costs.

1 year ago

I am in total agreement. In areas where we are forced to pay the higher amounts, we’ll cut in other areas. For me, I’ve reverted back to 100% telework so no longer am paying for the commute, my coffee at the office, or the occasional lunch. That money is diverted to my higher grocery bill which is something I really can’t cut. My employer has signaled they will allow 100% telework for all until December 2022, so I have plenty of time for this to get back to normal.

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