Inflation worries make great headlines but….

SKIMMERS SUMARY:

  • The Fed says they don’t have any past “templates” for to deal with current economic conditions.
  • Prices are up, in time categories, by double digits including airfares, used cars, and vacation destinations.
  • Eventually the economy will cool because consumers are saving more and paying down debt.
  • Retailers are going to pass along higher costs (increased wages) to consumers though.

Inflation has become a four-letter word over the last two months. Consumers are finding higher prices almost everywhere they turn, and it’s become a hot political issue with midterm elections not far away. However, common sense tells us that the economy will cool off.

A West Coast newspaper had a story about car dealers tacking on excessive destination fees on new cars. Why not? Demand is high right now and most hot car models are in short supply. The new Nissan Pathfinder, for example, is expected to go for full list price when it hits dealers later this month.

It’s the basic principle of supply and demand right now but there are also other factors in play. First, the backlog of merchandise sitting on cargo ships is at crisis levels. Industry executives say a backlog of ships on the water and an estimated 350,000 containers at docks will further rattle global supply chains deep into the year. Second, the global chip shortage is pushing up prices of items such as laptops and printers and is threatening to do the same to other top-selling devices including smartphones.

So the question becomes when these issues are sorted out will inflation cool. My answer is YES.

Prices are rising. In April, U.S. inflation rose at its fastest pace since 2009. Futures of global commodities integral to economic growth — including oil, gasoline, corn, and copper — cost twice as much now as they did a year ago. But there’s little reason to assume that these price increases signify a long-term, self-reinforcing, structural imbalance between demand and supply that can only be redressed through tight monetary policy.

As Rick Helfenbein at Forbes said “truthfully, as someone with an economic background, the better way to understand inflation is to evaluate your surroundings and ask yourself if prices are rising and what does that mean. In the fashion industries, the cost is up – cotton is up 34%, cost of labor has increased and freight costs have skyrocketed. In the retail world, the price of everything just seems to be rising at the same time. A high-quality tee-shirt that was $26 last year is now about $31. Lunch in town was $25 and now is $30. Gasoline that was $2.26 a gallon last year is now $3.06 (up 35%). TV viewers capture the sub-rosa drift of all this when they view the Liberty Mutual Insurance ads based on having some control over price. The yellow Emu bird in their commercial (named LiMu Emu) – delivers a timely retail message based on value.  But when Doug says: “Only pay for what you need” the commercial hits a marketing home run. Seriously, how true is that line in a time of rising prices – consumers should only pay for what they need”.

Economists look at two indexes to gauge inflation. When the Labor Department’s CPI rose 4.2% in April, there was a concern. Now, with a CPI of 5% in May there should be more concern – but the expectations have been tempered in the media with the shout-out – that this 5% number is “to be expected or transitory.” An economics professor would once said that “the numbers are the numbers,” and we should not argue with the data.

Forbes

There will always be idiots who will gladly pay a $10,000 destination fee on a car they want or bid an extra million dollars on a home they must have, and the media will use those instances to promote stories meant to scare us. But, for the most part, most of us will cut back on stuff we like to have but don’t really need.

Yes, retailers will pass on higher wage costs to consumers but some will not, Costco for example.

Common sense tells us that consumers can’t save more, pay down debt and spend a lot. Some brands are about to find out that their brand equity is a lot less than they thought when it comes to price increases.

Inflation worries make great headlines but….

About richmeyer

Rich is a passionate marketer who is able to quickly understand what turns a prospect into a customer. He challenges the status quo and always asks "what can we do better"? He knows how to take analytics and turn them into opportunities and he is a great communicator.

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