Feeling the pinch of inflation?

If the inflation blahs are getting you down, here’s why.

Since I became disabled, I haven’t experienced grocery prices firsthand. During the 2010s, when I could still drive to the store, there was little change in grocery prices, so I didn’t pay much attention. Then one day in 2022 my husband brought home a few bags of groceries and told me to guess how much it was. My guess of $75 was way off. It was almost $150.

My next words were something like, “what the [expletive deleted]?”

The main culprit? Cat food. But all grocery prices were up. Then I heard the continuing complaints of others, especially among those on social security. I keep telling them that inflation is down, but all they see are prices that remain stubbornly high.

We’ve all felt the pinch of rising prices. Did your wages increase enough to help?

Probably not, unless you changed jobs.

Changing purchasing power, uneven changes in prices, the problem of fixed and lower incomes, and sticky prices are just some of the problems caused by inflation.

In a previous post, I talked about sticky prices. Sticky prices happen when the price of something ratchets up but doesn’t go back down. Think of rent, wages, and certain staples foods, like oils. For us it was cat food. According to my husband the price went up, didn’t come down, but has stayed near the new higher price. He said the same thing about bacon.

Bacon prices increased by about 28 percent during the first year of the pandemic. Hoarding during the early years, combined with a number of other factors caused the price to rise and stay high.

Weather- and disease-related events led to price increases in many other food categories. Wildfires in the western states and droughts in the Midwest caused many prices to go up during 2021 and 2022. Avian flu also affected the price of eggs. The shut down of food processing plants, ports and borders during the early pandemic caused food shortages, too. All this led to an 11 percent rise in grocery bills from 2021 to 2022, according to the US Department of Agriculture.

And that leads us to the main problem with inflation, the general rise in prices from year to year, is that purchasing power falls. If grocery prices rise by 11 percent, then you would now need $11 where you would have needed $10 the year before. This is true for consumers, businesses, and all levels of government. Each group can buy fewer goods and services with the money they have. Let me share an example.

A friend asked me how much worse off she was after the inflation of 2021-2022. She’d heard that her purchasing power declined by 30 percent. To put this in context, suppose she made $100,000 in 2021. Then she could buy $100,000 worth of goods and services in 2021, given the prices for 2021. (No, the dates aren’t a mistake.) But if she made $100,000 in 2022, and inflation had reduced her purchasing power by 30 percent, then she could only buy $70,000 worth of the same goods and services in 2022. She was floored.

I had to reassure her fast.

According to the Bureau of Labor Statistics (BLS), a more appropriate number is 7.4 percent, making her purchasing power about $94,000, using our example numbers, based solely on her income. But she’d still lost a lot of money (in our example, $6000) of goods and services.

She would have had to get a 6.4 percent raise to maintain her purchasing power.

How many of us saw that?

We all feel that our dollars aren’t buying what they used to. During the 2010s, an 11 percent increase in price would have happened over a six-to-seven-year period. Having prices rise in a short period of time left us feeling disgruntled and worried. The Consumer Sentiment Survey, conducted by the University of Michigan, showed this. Even as inflation eased in 2023, while unemployment stayed low and growth beat expectations, we didn’t start feeling better about the economy until late in the year.

Businesses, which buy goods to help them make other goods, have to rethink what they will buy. Will a new piece of equipment will make enough of a difference to total costs when prices are higher? For instance, farmers looking to replace tractors switched to used equipment. Delays in manufacturing, caused by raw materials and labor shortages, increased prices by 11.7 percent.

Even governments have to reallocate their funds. For example, according to Inside Higher Ed, costs overruns at the University of Wisconsin at Madison led to the approval of $60 million in additional funding. The UW Board of Regents faced inflation from supply-chain issues in materials and a shortage of construction workers. Similar problems occurred in South Dakota. At the University of Hawaii, one project was $16 million over budget.

Next week, we’ll take another look at the impact of inflation on consumers, especially by geography, income, and race.

As always thanks for reading. Comments and suggestions welcome.

Nikki

BTW, I have goodies coming! Soon!