Word that inflation is low seems to be coming out regularly these days. But that’s not what grocery store shoppers shaking their heads about high prices are saying.
One reason for the disconnect is because flat wages in recent years mean that any type of price hike on purchased goods is felt disproportionately. The Census Bureau indicates that income for the average American household did not pick up in 2012. Further data show that, on an inflation-adjusted basis, median household income of about $51,000 was down roughly 7% from the $55,000 registered in 2000. It stands to reason that if consumers were enjoying steady income gains, they might not notice, or mind, so much when prices went up. But the lack of significant pay hikes has made consumers feel the pinch of higher costs more.
The ripple effect that higher oil prices have had is another factor influencing the way inflation is perceived. A period of rising oil prices preceded the past five recessions in the United States, including the severe 2007-2009 downturn. Quotations for crude oil have retreated somewhat in the interim, but not fully. Drivers are still paying more than $3.00 a gallon, on average, to fill up their gas tanks, something they did not have to do much of until 2007. Even though gas prices have leveled off in recent years, the push of oil prices into a higher range has been felt elsewhere, most notably in food costs.
Food prices rise when oil prices go up because of more expensive fuel for farm equipment, including tractors and combines, and higher transportation costs. Thus, the cost of food has followed the move by oil prices into a loftier sphere. Public policy has had a hand in tying food prices to oil prices, as well, owing to government mandates to use part of the corn crop for ethanol.
Higher oil prices have also resulted in more expensive petroleum-based products, such as automobile tires, which can easily cost over $100 apiece nowadays. Fuel surcharges for delivery services have become commonplace, too. And even tradesmen, such as the plumber, often tack on more on to their bills to pay for the cost of going back and forth. Clearly, everyday items, such as food and fuel, which are more expensive than in years past, raise the perception that inflation is biting at the many consumers who have not seen their wages go up measurably.
Rubbing salt on the wound, in a sense, is the concept of a core-rate of inflation that excludes food and energy costs. Somehow, discounting those mainstays at times seems reminiscent of the story of the non-swimming statistician who drowned in a lake with an average depth of three feet. Although the core-rate concept may have some usefulness in eliminating the effects of weather on agricultural crops, its design doesn’t appear to be as helpful with spikes in oil prices, which in the past might have been the result of temporary embargoes.
Nevertheless, there are broad forces in play keeping certain types of inflation at bay. Those include the opening up of the global labor pool with the rise of China and other Asian nations as manufacturing centers. The declining influence of labor unions has also made the wage-price spiral that occurred in the 1970s less likely to recur.
In the end, it may be the lack of wage growth that makes even low levels of inflation sting, particularly if what inflation there is arises more noticeably from everyday consumption of food and energy. Owning shares of energy companies, including those of Exxon Mobil (XOM – Free Exxon Stock Report) and Chevron (CVX - Free Chevron Stock Report) is one way to protect against rising fuel costs. Meanwhile, stocks of companies, such as Wal-Mart Stores (WMT - Free Wal-Mart Stock Report), Procter & Gamble (PG - Free P&G Stock Report) and Colgate Palmolive (CL), may provide insulation from higher prices for consumer goods.
At the time of this article, the author did not have positions in any of the companies mentioned.