Should You Worry About Inflation? The Answer Depends On Your Economic Class

Last week, the Bureau of Labor Statistics (BLS) announced that the Consumer Price Index reached 8.3% in April compared to last year. Year-over-year inflation rates have exceeded 5% for more than a year and exceeded 8% for the past three months.

The Federal Reserve promised to act aggressively, looking to raise interest rates four to six times this year, then three to five times next year, hoping to stamp out inflation like Fed Chairman Paul Volcker did back in the early 1980s.

Current inflation is driven by “lack of supply.”

Prices are high because the things that people want are no longer readily available. The lockdowns of the pandemic changed purchasing patterns at the very moment when COVID-19 shutdowns in China and Southeast Asia disrupted manufacturing. The February Russian invasion of Ukraine threw two other markets into disarray – fuel and food.

We’re skeptical that raising rates will have any effect on the components of inflation other than tamping down “asset price” inflation in housing and stock market investments. Raising rates will not end the war in Ukraine or reopen factories in China. Fuel, food and goods prices will remain elevated until supply catches up with demand.

How does inflation impact you personally?

Consider these categories of economic class:

* Wealthy – top 1 % of income exceeding $500,000 per year; $11 million or more in net worth.

* Well-off – top 1% to 10% of income between $200,000 and $500,000 per year; $1.2 million to $11 million in net worth.

* Middle class – top 11% to 30% of income between $105,000 and $200,000 per year; $300,000 to $1.2 million in net worth.

* Getting by – top 31% to 50% of income between $67,000 and $105,000; $120,000 to $300,000 in net worth.

* Low income - bottom 50% of income up to $67,000; less than $120,000 in net worth.

Federal Reserve Survey of Consumer Finances

Determine your economic class. Then consider whether inflation in the following components is annoying or painful to you personally.

* Food. Studies have found that Whole Foods charges about 30% more for the same shopping cart of groceries compared to Walmart. The Whole Foods shopper is more likely to be in the middle class, well-off or wealthy categoriew, and less likely to care about price increases. Low-income families may well scrimp on fresh fruit and produce to keep their food budget under control.

* Energy – Fuel prices jumped 66.7% over the last year. Retail gasoline prices increased 127% from a low of $1.94 per gallon in April 2020 to the recent high, including gains of 29% since the start of the year. For a larger car, pickup or SUV, a fill-up might cost $20 more than three months ago.

For well-off and wealthy households, the extra cost is annoying. Low-income families may have to work an extra two hours just to afford the gas to get to work.

* Imported Goods – Non-fuel imported goods prices rose 7.5% over the past 12 months compared to 3.8% gains in the previous year.

* Cars (new and used) - In 2009, amid a deep recession, people could buy cars for 20% less than the list price. Last summer, with supply constraints on chips slowing production, the price on the window was the price you paid. With chips still scarce and demand still growing, drivers may pay $3,000 to $6,000 over list price for new cars and wait 12 weeks or more for delivery.

Used car prices gained 14% year over year. When the chip shortage resolves in 2023, car prices should stabilize at higher levels. Buyers who can wait until next year should see the buyer’s premium go away.

* Wages - After spiking to nearly 15% in the first months of the pandemic, the U.S. unemployment rate fell to 3.6% recently. The Bureau of Labor Statistics reports 11.3 million job openings in the U.S. versus 5.9 million unemployed. Combine lots of open jobs with a limited hiring pool, and wages will surge.

How do businesses attract talent?

By paying more.

The U.S. minimum wage sits at $7.25 per hour, but no business can attract skilled labor for less than $15 to $20 per hour. The No. 1 complaint of business owners is how hard it is to get qualified workers at any price.

* Housing (purchases and rentals) - Housing prices peaked in 2006, fell 25% in the Great Recession and from that level doubled coming into 2019. With pandemic-era interest rates near zero, housing inventory low and building materials held up in supply chain snags, housing prices rose — then kept rising: The U.S. median home price exceeded $400,000 for the first time ever.

On the rental side, economists anticipated an eviction crisis that never materialized. Instead, vacancy rates are at the lowest levels since 1984.

Increasing rates make mortgages less affordable, which cools off demand. However, higher rates also make building more expensive, so new supply may be constrained.

Housing prices may stabilize at higher levels. Housing inflation has increased the net worth of long-time homeowners while shutting out first-time buyers.

* Stocks - Through the five years ending December 2021, the S&P 500 gained 113%, which is well above historic gains, but not surprising given low interest rates in 2020 and 2021. Now that interest rates are rising, the S&P 500 is down nearly 16% on the year, but still up 73% over the previous five years. The wealthiest 10% of U.S. households own 89% of the value of stocks.

Inflation Pain Correlates With Income

Over the past 20 years, real household income for the top quintile of U.S. families increased 74% for a net gain of $107,514 in current dollars.

Real household income for the lowest quintile of families increased 55% for a net gain of $14,011 in current dollars.

Wealthy and well-off families are well equipped to ride out the current inflationary environment, especially considering housing and stock market gains. Middle class families should be OK.

The getting-by and low-income families have the most to fear from inflation and will bear the brunt of job losses if the Federal Reserve rate increases drive the U.S. economy into recession.