The latest inflation report confirms what nearly every American household is feeling when they go to fill up their cars or buy groceries at the supermarket. Prices are rising fast on just about everything making inflation inescapable.
According to the Bureau of Labor Statistics, the consumer price index rose 0.8 percent in February and 7.9 percent over the past twelve months. This 12-month increase is now the largest since January 1982.
Consumers are poised to make spending and lifestyle changes. In the long run, these changes could slow down the economy.
The numbers
Driving prices higher were increases in gasoline, shelter, and food. The gasoline index rose 6.6 percent in February and accounted for almost a third of the increase on all items.
Check out our CEO Inflation Tracker to see price increases on many popular household items:
Consumers changes may be on the horizon
American households have absorbed rising costs so far because they have been flush with cash from multiple rounds of stimulus checks, generous unemployment benefits, savings from eviction moratoriums, child tax credit payments. and other forms of government aid.
Lockdowns meant that families had nowhere to go to spend money, especially if they received raises or secured bigger paychecks by hopping jobs. However, they are spending down their savings and real wages are falling as wages overall aren’t keeping up with inflation.
Given this stubborn inflation, consumers will likely alter their spending, dining, and traveling habits. AAA’s new survey found that “nearly two-thirds of drivers (59%) said they would change their driving habits if gas prices passed the $4 mark and three-quarters said they would do it if gas touched $5.” They plan to drive less by combining trips and carpooling. The generational difference is apparent as under-35-year-old drivers embrace carpooling while older Americans would simply combine trips.
Reduced driving could lead to increased use of ridesharing companies as younger drivers choose the backseat to being behind the wheel.
Beyond driving, spending habits are set to change according to polling earlier in 2022. Ipsos consumer polling finds that 80% of consumers expect to change their shopping habits if inflation persists. They plan to purchase fewer items, trade down to lower-priced items, shop for products on sale, and shop more for private label items.
Implications
The aggregation of changes in consumption patterns will undoubtedly slow economic activity and could perhaps slow down inflation. Consumer spending, called personal consumption expenditures (PCE), is the single most important driving force of the U.S. economy. Part of what’s driving inflation is the high demand for goods and services.
As demand cools, so may prices, but given the Russian-Ukrainian conflict and the volatility of already-soaring energy prices, it’s not a guarantee. Russia is a contributing factor but not the sole factor. As I explained, yesterday’s data was captured before Russia’s Ukraine invasion sent shock waves across international energy markets, so real-time inflation is likely worse. Yet the answer from our national leaders misses the mark:
“Washington has no good answers other than to spend trillions more and to reintroduce earmarks. That’s doubling down on the approach that has created this problem. Today, they want to blame foreign affairs, but it was the Biden administration’s fiscal and energy policies that fueled rising prices. More federal spending will only drive prices higher and increase hardship on American families.”