The United States is currently facing one of its highest inflation rates in decades, a situation so dire that the Federal Reserve is thinking about shrinking its bond holdings by a record $95 billion a month.
Fed chief Jerome Powell and crew are certainly in a bind.
After all, the U.S economy continues producing nasty inflation surprises. U.S. inflation hit a 40-year peak in February thanks to strong consumer demand and ongoing supply chain disruptions. The Federal Reserve’s favorite inflation calculator recorded a sharp 0.6% increase in February, and further justified the central bank’s plan to move faster to raise U.S. interest rates. The so-called personal consumption price (PCE) index climbed to 6.4% in the 12 months ended in February, up from 6.2% in the prior month, thus marking the biggest monthly increase since January 1982. The Fed views the PCE index as the most accurate measure of U.S. inflation since it takes into account when consumers substitute cheaper goods for more expensive ones.
The more widely used consumer price index (CPI) rose by an even higher 7.9% in the 12 months ended February.
The big question right now is: what’s driving one of America’s worst inflation regimes?
The harsh truth is that whereas the price of many items have risen exponentially due to a higher cost from labor expenses and supply chain hurdles, Americans are actually spending the majority of their money on a much narrower slice of items.
Even worse: wages have failed to keep up with the higher rates of inflation in many jobs, leaving consumers with less disposable income to pay bills as some are racking up more debt.
Here are 3 key sectors worst hit by inflation in the United States, particularly for households earning less than $50,000 per annum.
According to a survey of 2,200 people polled in February by Morning Consult, nearly one in three people said they are driving less because of having to shell out more money for gasoline.
Which is perfectly understandable, considering that the global energy crisis began long before Russia invaded Ukraine six weeks ago.
Indeed, since the beginning of 2021, gas prices have steadily risen and are now $2 a gallon higher.
“Additionally, behavioral responses to inflation, like driving less to limit gas consumption, could have secondary effects on economic activity, potentially reducing trips to restaurants or retail establishments," Morning Consult economic analyst Kayla Bruun wrote in a recent report on consumer spending.
You can expect to pay more just to put food on your table during a bad bout of price inflation.
Indeed, a recent U.S. Department of Agriculture forecast says American food-at-home prices are expected to increase between 3% and 4% by the end of 2022.
But that figure could end up being significantly higher.
According to the latest Consumer Price Index(CPI), grocery spending increased by 4.1% in February compared with the same month a year ago. During the past 12 months, prices for food consumed at home increased by 8.6% year over year. The cost of meat, poultry, fish and eggs is 13% higher since February 2021, while the price for vegetables has remained much more stable, increasing just 4.3%. Meanwhile, the price of pre-packaged cereals and baked goods has increased 7.7%.
However, only 12% of people in February said they put off purchasing groceries and food in February due to high prices, with a lack of availability in the inventory being a more likely cause.
"Inflation had already presented itself as a growing threat to economic growth in the United States, and recent geopolitical developments are adding fuel to the fire,” Bruun said.
That said, consumers are becoming increasingly savvy and have been cutting back by choosing different brands of food or buying items in bulk.
“In today’s high-inflation environment, consumers still buy the staples they need to get through everyday life, such as food, clothing, and medication. However, they are taking steps to make the most out of every dollar by shopping sales, choosing generic or store brand versions of goods, and purchasing used items whenever possible and buying in bulk or shared buying,” Leslie Tayne, a Melville, N.Y., attorney specializing in debt relief, has told TheStreet
The same study has found that housing accounted for 35% of total spending in February, with increasing rental payments impacting lower income consumers the most.
Monthly housing payment amounts in February climbed 10% Y/Y for households that earned less than $50,000 though it remained flat for middle-income households.
“Housing is one of multiple categories where inflation is disproportionately challenging lower earners: This group also tends to spend a relatively higher share of wallet on groceries and gas, categories with soaring price growth over the past year,” the report said.
But people who are buying houses are feeling the pinch, too.
So far, nothing has done much to slow down the ongoing housing boom, although not for lack of theories predicting how it’s going to end.
But the red-hot housing market is now facing its biggest nemesis yet: soaring mortgage rates.
Over the past three months, mortgage rates have posted their largest jump since the '90s, with the average 30-year fixed mortgage rate currently standing at 4.42%, up from 3.11% in December. .
The enticement of record low mortgage rates has been the biggest driver in the housing boom, encouraging more buyers to jump into the market. As home prices soared, low rates have been helping alleviate some of the burden for homebuyers. But with mortgage rates now climbing sharply, it’s very likely to have the opposite effect by increasing buyer's borrowing costs at a time when they're already stretched thin by record home price growth.
Indeed, experts are warning that the move up rapid move up in mortgage rates amounts to a major economic shock: Ian Shepherdson of Pantheon Macroeconomics predicts a 25% decline in U.S. home sales from the annual pace of 6.02 million set in February to a rate of 4.5 million by the end of summer.