One of my favorite game shows growing up was the Price is Right. It was a great show to watch on the days I got to stay home from school. One of my favorite games on the show was when contestants had to guess the price of various everyday items like Rice-a-Roni, Kraft Mac & Cheese, or Campbell’s Chicken Noodle Soup. Watching this show as a kid, I recognized all the food items but none of the numbers made sense to me. The concept of food pricing was foreign to me; that can of soup could have been $2.50 or $0.25. I had no clue because I didn’t do the shopping.
Unfortunately, the price of food and groceries is no longer foreign to me. And if anyone has gone to the grocery store recently, many of you will have noticed that prices for many items on the shelves are going up. It seems like many items that were $0.25 not too long ago are now $2.50. And it’s not just grocery items. Prices for many everyday items, from gasoline to wood, have jumped to surprising levels.
If prices for many items we use every day are going up, are prices for everything else going up too? Surprisingly, no. General inflation continues to be rather sanguine in the face of the COVID shortages. The Federal Reserve’s favorite gauge into inflation is the personal consumption index (PCE) and that continues to show inflation remains at very low levels. How can this be when gas prices are so high? Well, the biggest difference here is that while many Americans (including myself) tend to focus on prices we see every day, other measures of inflation (like CPI) tend to focus on a small, standard basket of goods and services. If your shopping cart isn’t the exact same as your neighbor, then CPI might be reflective of your inflation experience. The PCE measure accounts for all goods and services Americans consume. While prices for eggs might have spiked recently, we forget that the prices of many things have not gone up. In the most recent inflation reading, there are many areas where prices are not rising. Areas like clothing, sports and recreation equipment, and cell phone services saw prices decline last month. Of course, it’s much easier to remember the things that have gone up in price, not down.
We do expect inflation to move higher over the next few quarters, but we are still far from any new inflationary regime like we saw in the late 70s. Data continues to indicate this inflation scare is likely to be transitory (a fancy word for temporary) as the economy recovers from COVID. Persistent low inflation has been around for the past few decades. It’s going to take much more than a few quarters of higher-than-normal inflation to bring back the “Volker years”.
As always, please don’t hesitate to reach out to myself or your wealth manager with any questions you might have.
/ben