Central Markets by Robert Lloyd, CFA

The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the  information cannot be guaranteed. All opinions and outlooks are subject to change.

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  • Christopher Lloyd, CFP

Inflation Is Worse Than You Think



Everybody is worried about inflation. But there is a lot more behind the headlines on the latest inflation numbers. A lot of the talk Wednesday morning was wishful thinking along the lines of: "it looks like inflation is peaking!” I wanted to highlight a couple of points that show the inflation isn’t just supply chain related, and there are some fundamentally broken parts to the U.S. economy right now driving the price hikes we're all experiencing.

While gas prices have definitely had a meteoric rise over the past year, the headlines surrounding the Russian invasion of Ukraine and gas prices have dominated other significant inflationary data available. Food and home prices have risen substantially, reflecting 1) higher transportation costs, 2) higher fertilizer costs (some effects which won't be felt until the fall season), 3) avian flu, and 4) higher wages, among other factors. Luckily Texas has been buffered by many of the food shortages being felt across the nation, but even here there have been times everyone has seen empty shelves - baby formula appears to be the latest center of attention in this regard. The price index for "Meat, poultry, and eggs" had the largest 1-year increase since 1979. Unrelated to the avian flu (which is causing egg prices to skyrocket), "Dairy and related" had its highest 1 month increase since 2007. Food price hikes affect everyone, but the consumer will always allocate money towards food at home over other choices.


Beyond food, the chart above attempts to pull together the key unavoidable expenses every consumer in the country faces. Maintenance expenses for cars is at least 9.5% higher year over year, health insurance is up 10.4% year over year, and both used and new car prices are up 22.7% and 13.2% year over year, respectively.


Aside from the extreme levels of inflation in the basic necessities mentioned above, it may be the case that consumers are forced to make decisions that restrict their spending. For example, airline fares are currently up 33.6% year over year, and from March to April are up 18.6% in 1 month! That is the highest 1-month change ever, and the highest 12-month change since 1980. Therefore we expect to see a contraction in consumer spending on nonessentials and luxury goods, as their resources are 1) pulled towards basic sustenance and 2) pushed away from nonessential expenses.


Finally, one of the most alarming parts of this latest CPI report is that the owners equivalent rent is still not showing what real rental inflation is like in the U.S. Because of tradition, the Bureau of Economic Analysis doesn't look at actual rental rates to calculate CPI. Instead, the BEA conducts surveys of homeowners and asks them what they think is value at which their houses could be rented. This method is significantly outdated, and acts with a significant lag to real rental rates.


The good news is that it is possible to estimate broad rental rates using data available online. We looked at the Zillow rental index for house rental data and another research group at apartmentlist.com (who aggregate national apartment rent data based on median lease values nationwide). Based on their nationwide data, both single family rentals and 1/2 br apartments are experiencing year of year increases of over 17%! This is severely undercounted by the "Owners equivalent rent" value of 4.8%.

The reason the rental rates are so critical is that it plays a significant role in the psychology of inflation. Rental rates tend to stick, and so it's unlikely that consumers in rental positions will experience relief if supply chains ease. Once longer term inflation expectations shift, it will take dramatic actions by the Federal Reserve to get the situation under control. The last time that was attempted was the 1970s, which was also a time where inflation was driven by supply chain problems. If we're lucky, it won't come to that.



Cheers,

Chris Lloyd, CFP®, AAMS®

Vice President and Senior Wealth Planner

Lloyds Intrepid Wealth Management

Lloyds Intrepid LLC is doing business as Lloyds Intrepid Wealth Management. Lloyds Intrepid LLC offers investment advisory services in the State of Texas where registered and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. Lloyds Intrepid LLC and its advisers do not provide legal, tax or accounting advice. Lloyds Intrepid LLC formulates retirement plans, investment strategies, portfolio construction and investment due diligence for clients with signed investment advisory agreements with us. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All opinions and outlooks are subject to change.


© 2022 Lloyds Intrepid LLC

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