I think Americans are a
little perplexed when they see news reports of
inflation coming down, and yet they don't notice any
of their prices coming down. 65% of U.S. adults surveyed by CNBC
said inflation is the main driver of their financial
stress. Nearly half feel like
they're in a worse financial situation than five years
ago. It's still shocking to go to
the store and have your bill be a lot higher than it
used to be. While inflation is slowing
down, prices are still elevated. This includes
many goods and services such as food, gas, repair of
household items and car insurance. Economists suggest that the
prices are not going to go back down. But if inflation keeps going
the way it's going, at some point you're going to hit
that rubber meets the road point and people aren't
going to be able to spend anymore. And only then is
the point where you might start to actually see
disinflation and then maybe deflation outright after
that. Here's why prices probably
won't come back down and what consumers can do about
it. My name is Jenn Lueke. I'm a recipe developer and
I create content on Instagram, TikTok, and
YouTube showing people how to eat well on a budget. I turned a $50 grocery haul
into 20 servings of healthy dinners. Yes, in 2024. Prices are going up across
basically every industry right now, things that are
really taking a toll on a lot of people. But, you
know, if we can save a little bit of money each
week on our grocery bill, that's going to maybe
lighten the load a little bit. And I try to
prioritize that. But even in my personal
life, things have just gotten more expensive. Every aspect of my life has
gotten more expensive. I just try to focus on the
things that I can control right now and try to get
those costs down. The Consumer Price Index, or
CPI, is a broad measure of the cost of goods and
services across the economy. It shows how prices have
changed year over year. Food prices will go up and
down. This is one of the reasons
why the Fed tends to look at what they call core
inflation. That excludes food and energy prices
because those prices are flexible. But a lot of the
things that we do say housing prices, furniture
prices, the long lasting items that are called
durable goods, those prices tend to not go down. The price of chicken is a
good example of prices going up for groceries. Chicken
used to be, for me, like 3.99 a pound for the
chicken thighs or even 2.99 a pound. And then for the
chicken breasts, more like 4.99, 5.99 a pound. Now, chicken thighs are
pretty much the price of what chicken breasts used
to be. So that's why I like to opt
for a chicken thigh. It's a cheaper cut of meat. They're also really
flavorful, so I just like cooking with them. Price growth is not really
that complicated. It's a simple equation with
the addition of costs and profits. We're looking at
these three underlying drivers of price growth. We're looking at the
component that comes from the labor costs, the
component that comes from the non-labor input costs
and the component that's being driven by the profit. So if you look very
carefully at what sectors the inflation was in, it
was a supply side shortage generated by the pandemic. It was the war in Ukraine. It was demand shifts. All of that was the
underlying source of the inflation. And therefore
the Fed's response of just raising interest rates
wasn't getting at that underlying source and in
some ways made things worse. And then it's just kind of
kept feeding on itself, which is another thing that
inflation does. Congress and the Fed were
pouring in tremendous amounts of stimulus to the
economy. It just created a sort of
what you would want to call a perfect storm for
inflation, those various factors. 74% of Americans polled in
swing states feel that inflation is moving in the
wrong direction, even though prices have been rising at
a slower rate since a peak in June 2022. The people are sort of asked
almost anything about the economy. They react in a
very sort of visceral way that everything is lousy,
even though there's a fair bit of evidence that bit by
bit, things are getting quite a little bit better.
The fact that this negativism is so pervasive
in the face of evidence is fascinating. That disconnect may come
from how we measure the economy. Economists will talk about
the delta of things, and what the delta means is
just the rate of change rather than the absolute
value. And what that really means
is like, say you're paying $2 for a gallon of gas and
then it goes up to 250. It's just like that's a 25%
increase. So it's really that rate of
that change. Two 50th May not seem that
bad. Still, from a historic
perspective of what you're paying for gas, but it's a
lot more than what you had been paying just a little
while ago. So that's why it feels even
tougher. Some people may struggle
with a psychological phenomenon called money
illusion. People with money illusion,
they don't take into account the level of inflation in
an economy. So they wrongly believe
that a dollar today is worth the same amount that it was
the year prior. So even if your income is
rising each year and you're getting a raise with
inflation, it doesn't feel like you're ever getting
ahead because everything is more expensive. So it can feel like you're
on this hamster wheel. The reason why people get
so angry when they go to a coffee shop that, you know,
a cup of coffee used to cost $4, now costs ten. And it leads to so much
frustration and anger and disappointment, almost like
you're being robbed or ripped off. We went through such a long
period where we didn't have any serious inflation, and
now just getting used to this rate of change where
things are, you know, 20, 25% in some cases higher
than they were before. It makes it feel maybe a
lot worse than it would if you just sort of looked at
absolute dollar value of things. Food is one of the most
volatile goods. The government tracks. Grocery prices shot up
after the pandemic, which led to sticker shock for
many people. Probably the best example
would be eggs. Eggs were always my staple,
where it's like, I'm only going to spend $2 on a
carton of eggs, and that's going to be a great protein
for the week. And I remember going into
the store in 2021 and 2022, seeing it be $5 and then
$7. You go to the grocery store
now, and some of the cartons of eggs are 11.99. The fluctuating price of
eggs wasn't just a pandemic side effect. The increase
in price at the end of 2022 and into 2023 was largely
due to an outbreak of a highly contagious bird
virus, which contributed to an egg shortage. The price began to drop in
February 2023, only to rise again when the avian flu
resurfaced at the end of that year, just in time for
increased holiday demand for eggs. People are every day
experiencing these price increases and seeing them
across all aspects of their life, and people are
struggling because of it. Meanwhile, some companies
are keeping their sales prices high as the cost of
production falls. The Producer Price index,
or PPI for short, measures the change over time in how
much businesses pay for the products they sell when
compared to the consumer price index, which is how
much consumers pay for products. There's a
disconnect. Cpi has been consistently rising. Ppi has been trending
downward since peaking in June 2022. The big driver of price
growth over the last few quarters has actually been
the profit piece of the equation. Companies
actually kind of juicing the markup what they charge
over and above their underlying costs. When consumers absolutely
have to purchase an item, when it's a must have. Not a nice to have
companies have a bit more pricing power. Companies
also have more pricing power when they have a lot of
market share. One of the things that you
see, if you look at the earnings calls for the two
big diaper duopolies, um, Kimberly-Clark and Procter
and Gamble, who basically own 70 plus percent of the
diaper market. What you see is, while
diaper prices have stayed high, one of the key
ingredients in diapers, that wood pulp, which is the
sort of absorbent material that helps diapers
function, the costs of that have come down considerably
over the course of the last couple years. And yet
consumers like me aren't seeing savings on diapers. Another disconnect between
the messaging and the experience is the
statistics around wage growth. The gap between
wage growth and inflation is narrowing. Since May 2023,
wages have been increasing faster than inflation has
been rising, an analysis from Bankrate suggests. Wages may eventually catch
up with inflation. The report estimates the
gap could fully close around the fourth quarter of 2024. Most Americans can expect
an annual pay bump of around 4% in 2024, which won't be
enough to cover higher costs. I think, you know, for many
Americans, wage growth is very overdue. They gone years, if not
decades, in some cases with stagnant wages or or small
raises. There are indications that
there's more room for wages to increase and more room
for wage growth. The corporate share of
national income, you know, is is rising, and the labor
share is not rising as quickly. We've just been shown over
time that prices rarely will go down. They will go up a
lot easier than they will go down. There's a key difference
between inflation increasing more slowly, which
economists call disinflation, and inflation
reversing itself, which could lead to prices coming
down, a phenomenon called deflation. Disinflation is good because
disinflation means that the economy is still growing,
but the rate of price increases is coming down,
and hopefully you're finding some sort of stasis in the
economy. Deflation is just generally
associated with not just recessions, but deep
recessions in the economy. Historically speaking,
deflation means that prices are actually coming down. And the reason why prices
are coming down is because people aren't spending
money. Americans are still spending
money. Retail sales were up 2.1%
year-over-year in the first quarter of 2024, and
consumer spending jumped in February and March. Despite this, experts have
raised concerns about possible pockets of trouble
as total credit card balances in the US spiked
to a record high of $1.08 trillion in the third
quarter of 2023. Nearly half of Americans
with credit cards say they are carrying a balance from
month to month, according to a November 2023 survey by
Bankrate. Most economists who I speak
to now still believe that we are on a disinflationary
path, that inflation is heading on its way down. I think absent any type of
major shock event, the inflation is kind of where
it's going to be for a while, and there's not a
lot of outlook that inflation is going to spike
from here, but it is going to take some patience as we
watch that rate come down. I encourage people to shop
where it's convenient for them, but don't be afraid
to go to multiple stores if it works for your schedule,
you know, seek out a more budget friendly store. My number one tip for
saving money on your groceries is to have a
plan. I think the worst thing
that you can do when you're trying to save money on
your grocery bill is to show up at the grocery store and
have no idea what you're going to be buying and what
you're going to be eating that week. One of the great adages
about inflation is the best cure for high prices is
high prices. The meaning of that is that
at some point there will be an equilibrium. Prices will reach what
economists call the point of diminishing returns, when
they will no longer be able to have that pricing power,
and they'll have to pull it back. Companies have not
hit that point yet.
