This was the week of consumer angst. Inflation is pushing prices up, while the stock market started the week trending down.
“The economy is going through some dramatic adjustments as it opens up following the unprecedented circumstances associated with the pandemic last year,” said Mark Hamrick, senior economic analyst for Bankrate.
Then there’s the panic over gas.
“Top off your cars,” a friend texted this week. “Costco and BJ lines are extremely long this morning and smaller stations are running out of gas.”
It’s the toilet paper selloutall over again. This time, the buying frenzy followed a cyberattack that shut down a pipeline that supplies the East Coast. Drivers rushed to fill their tanks and plastic containers, causing the very shortage they feared. Colonial Pipeline said it’s restarting operations after a ransomware attack, so supplies should be back to normal soon.
But other factors, chiefly inflation, are still causing consumer concern. Here are some answers to questions you may have about what’s going on with the economy.
If you have a long-haul trip this week, get in line for gas. Otherwise, you can ride out this short-term supply issue.
“There is no gas crisis, and the situation this week is entirely contrived by consumers who are panicking for no valid reason,” said Ric Edelman, founder of Edelman Financial Engines and author of “The Truth About Your Future.”
“The problem is not even as bad as a hurricane, which also disrupts supplies for a week,” Edelman said. “But in that case, it leaves behind massive destruction. In this case, a spigot was simply turned off. It’ll be turned on again, and gas will resume its normal flow to consumers. Within a week, there will be a glut of gas available, just as there is a glut of toilet paper on the market because so many people bought so much toilet paper last year when the pandemic began.”
In short, inflation is the rate of change of prices, says Tendayi Kapfidze, the chief economist at LendingTree, a leading online marketplace for loans.
Inflation data out Wednesday showed that the consumer price index (CPI) rose 4.2 percent year over year in April, which is the fastest increase since September 2008, Kapfidze pointed out. The Core CPI, which excludes volatile food and energy prices, rose 3 percent year over year, the largest growth in 25 years, according to the Bureau of Labor Statistics.
“The biggest contributor to the inflation numbers were used cars and trucks, which rose 21 percent year over year as demand rises with reopening amid constrained supply,” Kapfidze said in an interview.
Right now we’re seeing the U.S. economy emerge from the pandemic, and there’s pent-up demand for everything from cars to lumber to travel, said Christine Benz, director of personal finance for Morningstar, a leading provider of investment research.
“Some consumers have had more of an opportunity to save over the past year than would be the case in normal times, which further contributes to the heightened demand and spending now,” Benz said.
“To say prices are rising doesn’t quite capture the sticker shock some consumers may have when they look to resume their normal daily lives,” said Russell Price, chief economist at Ameriprise Financial.
As to why inflation is rising, there are two main factors, according to Kapfidze.
First, prices fell last April as the pandemic hit, so some of the increase in the price of services and goods is just the reopening bringing prices back to normal.
Second, with the reopening, we are seeing demand rebound much faster than supply, so this leads to higher prices.
“As prices rise, it’s a great time to review your budget and ensure different categories are still remaining within comfortable limits,” Kapfidze says. “A classic response to higher prices is a substitution, so consider if you should discontinue using some items or services and replace them with others or reduce the quantity.”
A good example of a substitute is switching from a name brand to a store brand, he said. If you’re in the market for a car, consider buying a used car rather than a new one. Or widen your search to find a different car model with a lower price point.
“The core idea is that the substitute can largely fulfill the consumer need at a lower cost,” Kapfidze said.
You might also delay some purchases until prices stabilize.
“Avoid spending in areas that have experienced rapid price increases if you can avoid it,” Benz said. “For example, if you don’t have to do your home remodeling project right now, there may be a more opportune, cost-effective time down the line to do so when lumber prices have moderated.”
“Higher prices for things such as air travel, furniture, appliances, lumber, hotel stays and automobiles should start to ease as supply and demand rebalance in these industries over time,” Price said. “For these items, the best strategy may be to wait it out. It will be tough given what we’ve been through, but you’re simply going to pay more if you want to be first in line.”
The best way to manage during this time is to devote more time and attention to your personal or family budget and make sure you have sufficient emergency savings, Hamrick said.
Businesses with pricing power can benefit from inflation if they are able to increase the price ofwhat they sell for more than the increase in their costs, Kapfidze said.
“If you are a borrower, inflation means you pay back your loan with dollars that are worth less than when you took out the loan,” he says. “Interest is meant to compensate for this, that’s why when inflation goes up, interest rates do too.”
If you’re working and earning a paycheck, you may well be eligible for cost-of-living adjustments in your paycheck, Benz says.
“The same goes for people who are receiving most of their incomes from Social Security, in that Social Security provides ongoing inflation increases. It may not be as much as you would like, but it’s something,” she said.
“A little inflation is good, as it supports lending, investing and borrowing, which all contribute to economic growth,” according to Kapfidze. “Too much inflation is bad, as it erodes the value of savings, and deflation is bad, as it discourages spending.”
Inflation is part of the routine business cycle, which means you should put what’s going on now in perspective, Edelman says.
In 2019, the economy was doing well with low unemployment, and stable interest rates and inflation rates. Then the pandemic hit. Millions of people lost their jobs, and consumer spending fell.
“In an effort to generate revenue and stay in business, companies lowered their prices. This is called deflation. As part of this, the Federal Reserve lowered interest rates to make it easier for people to afford loans, so they could buy houses and cars, all to help the economy stabilize and ultimately recover,” Edelman explains.
Although the economy is recovering, supplies are short in many areas because manufacturers reduced their output.
“With lower supplies and new, higher demand, prices are rising,” Edelman said. “This can be expected to continue for some time.”
Many sellers are elated about the uptick in demand, such as people selling their homes or auto dealers.
“Be prepared to spend more on everything from groceries to homeowner’s insurance,” Edelman said.
“Stock market participants appear to be watching inflation closely, and recent indications of inflation flaring up have caused some of the recent volatility,” Benz said.
There are a lot of reasons that higher inflation might be bad news for stocks.
“One is that higher prices can put the brakes on growth,” Benz said. “If it costs more to remodel your home, buy a car or hire people because wages often go up with inflation, you might opt not to do it. Corporate profits can get hurt if companies aren’t able to pass on their higher costs to consumers. In addition, the Federal Reserve could raise interest rates, which increases borrowing costs.”
As far as what to do, it depends on your life stage, the experts said.
Learn from the fall and rise of the stock market last year, Hamrick says.
“Anyone who jumped out of the market when it was diving last year likely had a difficult time knowing when to get back in, essentially locking in losses and failing to enjoy the gains which followed,” he said. “If you are investing money you can’t afford to lose, dialing down risk is the most prudent approach.”
“Younger people with lots of stocks in their portfolios should do their best to ignore the gyrations, as always,” Benz said. “The good news for them is that stocks have historically beaten inflation by a solid margin over longer periods of time, so stocks are really their best defense.”
If you can leave the money invested for 10 years, it’s reasonable to be confident that the future prices will be higher than today’s prices, Edelman said.
“A balanced portfolio should weather the storm over the long term, but if you have expenditures that will occur in the near future, then you’ll want to have money for that in less volatile financial instruments,” Kapfidze recommends.
But inflation is arguably more problematic for people who are getting ready to retire or in retirement, because inflation eats away at the purchasing power of fixed-rate investments they might have in their portfolios, like bonds and cash, according to Benz.
“That’s not to say they should throw those fixed-rate investments overboard, because they do need safety in their portfolios,” she said. “But it argues for having ample exposure to stocks in retirement, too, and also making room for safer investments that offer some protection against inflation, like Treasury Inflation-Protected Securities.”