2022 had two sides of price changes. There was inflation for things we actually need, like rent, fuel and food. Then, there’s the random stuff we don’t really need, which became absurdly cheap.
Just take a look at this week’s Consumer Price Index report, which reflects the changes in the price of goods over the past year:
- Smartphones, 23.4% cheaper.
- Televisions, 17.9% cheaper.
- Computers, peripherals and smart home assistants, 4.5% cheaper.
- Footwear, 0.2% cheaper (yes, I know footwear is a necessity, but given that Americans apparently buy 7.5 pairs of shoes each year, I am not sure this is a must).
- Rent, 7.2% more expensive (the largest increase on record).
- Household energy, 15.4% more expensive.
- Bread, 16.2% more expensive.
- Potatoes, 17.5% more expensive.
- Fuel oil, 58.1% more expensive.
- Eggs, 59.6% more expensive.
We’re looking at an inflationary situation that can only be described as bizarro. The absurdly high cost of fuel oil is worrying New England residents heading into winter. Rent inflation is slamming people everywhere from New York City to Tulsa, Oklahoma. However, it’s never been easier or more cost effective to buy random crap we don’t really need. (Weeks into December, Black Friday sales are still going strong.)
It’s a sign of a fairly unhealthy economy. Experts told FreightWaves that the Federal Reserve will continue to push rate increases until we all stop spending so much money on goods and services, in hopes that it can cool off price hikes on the things that actually matter.
“The craziness is that people are still spending,” said G. Tony Bell, an assistant professor at Rutgers Business School. “Even with interest rates rising, it still hasn’t put as much of a damper as what was expected. Yes, they are impacted, yes, they’re hurting, but it doesn’t seem like they’re hurting as much as we may think.”
Here’s why air fryers, televisions, stand mixers and vacuum cleaners are ultracheap, while eggs, fuel and rent are historically expensive … and why it’s more concerning than it appears on the surface.
Fuel, food and housing costs see historic inflation
The war in Ukraine resulted in historic fuel and food price increases this year. As a leading exporter of oil, Russia largely going offline meant that companies had to scramble to find other sources of energy.
This has been especially impactful on the cost of airfare, which was up 25% in November compared to the year prior. “It means that you’ll be sending a lot of Christmas presents by Amazon, instead of going to Grandma’s house,” joked (maybe?) Colorado State University’s Zac Rogers, an assistant professor who researches supply chains.
The increase in energy prices also hurt the food industry. Because food is so low margin, any increase in input prices are much more likely to be passed on to the consumer. (For comparison, high-margin goods, like iPhones, aren’t as subject to increases in fuel or transportation costs.) Exports from Ukraine, typically a top exporter of inputs like sunflower, corn and wheat, sharply declined this year, which also contributed to the spike in food pricing.
The price to buy a home is starting to sink, thanks in part to rate hikes from the Federal Reserve. But, rents are increasing faster than ever, in part because it was unusually challenging to buy a home this past year. Construction of new units may be delayed by rising interest rates.
Finally, some things are more expensive just because it’s a great time to hike the prices on stuff, according to University of Wisconsin Professor Steven Deller, who studies agricultural economics. “Historic inflation” is a great excuse to bump up the prices of whatever you’re selling, even if you don’t really need to.
“You look at some of these industries and you think, ‘There’s no reason for these prices to be this high, there’s no underlying factor behind it,’” Deller said. “A lot of times it’s companies that are able to take advantage of the situation that’s going on.”
This week’s CPI report brought semi-cheery news that inflation is cooling, after 18 months of consistent price increases. Inflation hit 7.1% in November, down from its peak of 9.1% in June. Meat and gasoline price increases, in particular, are slowing. As of Thursday, gasoline prices are actually lower than they were at this point last year.
This slowing inflation was apparently not sufficient in the eyes of the Federal Reserve, which hiked rates a day after the CPI report was released.
The Great Inventory Bloat of 2022
You are likely already familiar with the Great Inventory Bloat of 2022 and why it resulted in remarkable discounts. Nevertheless, I will tell the tale again.
Through 2020 and 2021, eager consumers bought lots and lots of stuff, as they had little else to do. Many of those purchases were goods like cooking equipment, furniture and electronics — stuff to make being stuck at home easier. Federal stimulus cash made that shopping spree a little easier.
Early in 2022, consumers stopped buying with as much glee as they did the previous two years. The increase in prices on necessary goods shaved off some consumer spending, while other Americans began to spend more on travel, movie theaters, sporting events and other services not readily accessible in 2020 and much of 2021.
Retailers were still stocking up on plenty of durable goods, however. As a result, there was a mismatch between consumer demand and retail inventory at some of the largest big-box stores. This was particularly noticeable in retailers’ first-quarter earning reports. Amazon reported a 46.7% increase in inventory in its first quarter, compared to a sales uptick of 7.6%. It was even more glaring at stores that specialize in electronics and home appliances, like Best Buy, which saw a 9.3% inventory increase and an 8% sales decrease. The goods industry broadly had a 19% discrepancy between inventory and sales growth, according to an October Morgan Stanley report.
Many of these retailers have managed to work through their “inventory bloat.” Much of that is thanks to a markdown bonanza that’s still ongoing. Weeks after the official end of Cyber Monday on, well, Cyber Monday, stores are still pushing unusual bargains on big-ticket purchases like KitchenAid mixers, Samsung televisions and even Apple goodies like MacBooks and AirPods Max.
As Morgan Stanley analysts wrote in October, “We believe many [retailers] will turn to aggressive discounting to solve their inventory problem which is likely to spark a ‘race to the bottom’ as companies attempt to cut prices faster than peers and move out as much inventory as possible. This dynamic will weigh heavily on margins and fuel the earnings slowdown we are predicting.”
Deller of the University of Wisconsin pointed to another quiet driver in why random stuff is so cheap now. Because of the strong dollar, imported goods are now slightly cheaper than they otherwise would be.
Consumers are still spending despite historic inflation, which may not actually be a great sign
Bizarro inflation may lessen in 2023 as retailers right-size their inventories and price hikes in fuel and food cool off. However, some economists say our propensity to still spend lots of cash amid historic inflation may mean a recession is yet to come.
According to the latest report from the Bureau of Economic Analysis, inflation-adjusted consumer spending was still slightly up in the third quarter of 2022 compared to the same period last year.
However, spending on goods like furniture, food and games is down. It declined in the second quarter of 2022, too. (Notable declines include household appliances and furniture repair, household paper products, and new foreign autos.*)
At first, we expected that the reason consumers weren’t buying as many air fryers or couches was that they were too busy spending extra cash on gas. Now, it’s become clear that American consumers are still keen on spending their cash. It’s just that they’d rather spend it on trips to Italy or sporting events. Meanwhile, the personal saving rate hit a 17-year low in October.
“The American consumer is among the most resilient and robust economic forces in the world,” Rogers said. (Yipee!)
More Fed rate increases to come!
Consumers are still buying up a storm, even amid historic inflation. You could take it as a good sign, or you could take it as a sign that the worst is yet to come.
In the viewpoints of some economists, it means the Federal Reserve will continue to increase interest rates … until we all stop buying stuff (and services).
“It’s gonna get to that inflection point where consumers won’t be able to absorb that anymore,” Bell said. “But today, we’re not really seeing as much of a slowdown as we expected.”
Phil Levy, chief economist at freight forwarder Flexport, agrees. “We haven’t seen consumption drop off,” Levy said. “I do think that we are going to head to a point where consumption will have a pullback.”
He said that means a recession “at some point, unless we get extraordinarily lucky.”
“We just don’t have a lot of experience of working inflation out of the system without a bit of pain in between,” Levy said. “That pain is going to mean to retailers that you’re going to see sales drop off, not uniformly across everything. … I’m a skeptic of the whole soft landing story.”
*Purchases of clothing for women, children and infants declined, but purchases of men’s clothing increased. Explain yourselves!
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