Thanks to the Federal Reserve, borrowing costs are down. But the last time I took my vehicle in for service, it cost me well over $1,000 because a few parts had to be replaced. I have a trustworthy mechanic, but it seemed like a lot for what got done.
My insurance bill was up quite a bit from the previous year and what really bugged me was that it was with less coverage. My optometrist, dentist and veterinarian are all charging more for their services. And my plumber, God bless him, swims in his heated outdoor pool in winter with snow on the ground. Point being—I don’t care what any statistic says, there is price inflation in the marketplace right now. More than is being admitted to by the Federal Reserve or comprised in the Consumer Price Index (CPI). And we haven’t even gotten to fuel costs yet.
There is nothing wrong with a little price inflation. The Federal Reserve, like many other central banks, targets a two-percent annual inflation rate, but the big problem is inflation in the face of stagnant incomes. That’s wealth destruction and the Federal Reserve can’t do a thing about it.
Compared to other economies, the U.S. economy has always been good at righting itself after a shock or recession. But now, it really is different. There is little to no financial flexibility in fiscal and monetary policy. The Federal Reserve created the money and it’s been spent. Corporations and Wall Street benefitted significantly, but the average consumer is stuck—and with the bill too.
The headlines show tame inflation numbers, but we all know there’s price inflation out there because it costs more to get to work, eat out, pay your electricity bill, and take the subway. But the real problem going forward is this: the commodity price cycle, which is not over.
The U.S. economy should be able to squeeze some modest GDP growth this year. But with corporate attrition, cutbacks and limited new hiring, lasting job creation will be challenging. (See “The Fed’s Running the Show and Risk Keeps Going Up.”) This means that income growth should be flat and, with the inflation we already have, purchasing power will continue to erode for a lot of people.
When the commodity price cycle makes its full transition into the agriculture sector, raw material costs are going to go up even more and this means food will become much more expensive. Food and energy—the two most important things that are excluded from inflation numbers.
The only way the Federal Reserve can fight higher inflation is with higher interest rates. They already dropped a hint about ending QE3. So, the very thing the Federal Reserve’s been pining for will soon become a reality. The cycle is going to change, and guess who will be paying for it?