COMMUNITY CONVERSATIONS: High rate of inflation causing a lot of pain

The discussion was co-hosted by Community Impact Editor Nick Hrkman and Reporter Lynn Hulsey and included expert panelists from around our area:

Editor’s Note: The transcript below has been edited for brevity and clarity.

How should we view the current rate of inflation? Is it cause for alarm, or is this something we’ve seen before?

HAYMOND: I don’t think you need any of us panelists to tell our viewing audience that this is a high rate of inflation and causing a lot of pain. Households are strained and facing budgetary pressures. While some workers have had raises that have been higher than the rate of inflation, many have not.

If you want to think about it historically, you’ll hear that this rate is the highest since the 1970s. But one of the problems with that is they changed the methodology from the 1970s. People that looked at that show that our rate of inflation to actually be much more in line with some of the peaks of the inflation during that time. The point is, the pain that was experienced in the late 1970s isn’t very much akin to the pain that our our viewers are hearing and feeling today.

KINSEY: People with less discretionary income, they’re spending more of what they make after tax on things they have to spend it on. People at the upper income levels with more discretionary income, it’s easier for them to cut back or decide where they’re going to spend money.

Last week, for example, Darden Restaurants, who operate both low-end and high-end restaurants, released their earnings and they talked about how for Olive Garden they’re seeing more menu management, people being more careful with what they’re ordering. They’re seeing a little bit more of an earnings issue there as opposed to their upper-end restaurants.

The longer this goes, it’s going to affect everybody, to some extent. So my hope is that, you know, this is largely a pandemic related issue, it seems that’s what sort of jumpstarted this problem.

SHIELDS: There’s another thing that’s unusual about the breakdown of inflation that we have seen in the last few years. Specifically, corporate profits have made up more than half of the inflation that we’ve seen in the two years ending in the fourth quarter of 2021. Labor costs, by comparison, are comprising only about four percent. And that’s sort of a reversal of what we’ve seen over the last 40 years. Usually wages make up a significant share of pressure to increase prices. Now, we’ve kind of seen that flip. And I think that that has some major implications. One, on the pain that people are feeling as a result of this workers are not having the same success that they have had historically in bargaining wages that are commensurate with that inflation. And I think that it also has real impacts on what is going to comprise a successful policy response to the inflation that we’re seeing today. The standard policy response that we have to fight inflation works by slowing down and constraining the labor market. There are real concerns about the impact that that’s going to have on working people now, given that wages are not the driver of inflation.

KINSEY: It seems that the pandemic jumpstarted focus on labor costs, certainly as it affected the service sectors and people on the front lines. I think we’re at the beginning of more labor pricing. I mean, if you look at the discrepancy between the C-suite and the average worker, it’s at horrendously high levels. I think labor’s positioned pretty well for pricing power, as long as the economy doesn’t slow down too much.

FERRUSO: For my members, they’re not the C-suite. They’re not the the corporate profit folks that Michael and Jeff referenced. Our members are in fact struggling with labor. It’s a huge impact on our business and three quarters of our members have increased wages at least once and are looking to do so again. They have to in order to be competitive in the market. The pressures in small business are significantly greater than on their larger brethren.

Energy price increases have caught many people off guard. Shopping for an energy supplier can be confusing. Do you have any advice for consumers?

KEELY: One thing I would encourage people to do is take their time, make sure they understand who they’re looking to do a contract with, what the terms of those contracts are. The way the energy market works, in order to secure a rate into the future, those suppliers have to go out and actually hedge that energy with either a financial swap or hitting energy market with a generator to actually say, okay, I can serve this price in the future. So with that, if that market changes, if you leave early, sometimes there’s termination fees, and those can be significant for businesses or residential customers. So it’s understanding what you’re getting yourself into so that you don’t put yourself into a bad position later.

You’ll see a lot of introductory-type offers out there where hey, we’ll sign you up and you can pay four cents. Well, if you’re paying four cents for the first three months and all of a sudden that jumps to 20 cents, you’re not coming out ahead. By time you find out, you’re stuck with that rate for three, maybe four months of paying that higher rate. Work with somebody reputable is the biggest piece of advice I would give people.

What do you think of the idea of a gas tax holiday either federal or at state level?

FERRUSO: A gas tax holiday certainly provides some short-term money back in the pockets of not only individuals and their families, but also businesses, depending on what industry you’re in. For those who are operating here in Ohio, we have a bifurcated motor fuel tax that was increased in the last transportation budget. So those folks who are operating heavier pieces of vehicles that require diesel fuel, their burdens a little bit greater. This is a concern for our members. In fact, about 40% of our Ohio members said that the increased cost of fuel is a significant having a significant impact on their business.

HAYMOND: I appreciate the the idea that the political class is going to try to help us out with some of this problem, but I think this is the wrong answer. Unfortunately, the overarching thing with any kind of inflationary problem is too much demand relative to supply. If we lower the gas price further, that’s going to bring the demand back up when the real issue is how do you get supply? When you’ve got a demand/supply imbalance, the solution is not to exacerbate that imbalance, it’s to work on the other side of that equation. So I think that this is a short-term fix, but not doing anything longer term.

The overall economy appears strong by a number of indicators, including low unemployment and employment nearing its pre-pandemic level. How optimistic are you in the overall strength of the economy?

HAYMOND: The problem is that unemployment is a lagging indicator. Whenever the National Bureau of Economic Research declares an actual recession, we may already be in one. So I’m not so sure that it’s as strong as we think. We’ve had slow growth, negative growth last quarter, people are expecting negative or very slow growth this quarter. I’m a strong believer that we’re probably going to have a recession within six to nine months.

We’ve mentioned Ukraine. We talked about supply chain. But supply and production is always about how do we get production increased? Our labor force participation rate is lower than it was when we started this. How do we get more labor to work with?

FERRUSO: You asked about optimism and one of the things we do in NFIB survey our members on a monthly basis and we have what’s called our Optimism Index. It measures the confidence our members, small business owners and entrepreneurs, not only in Ohio but across the country, have with respect to their comfort level and doing the things you want businesses to do: expand, making purchases, hiring folks. We’re at historic lows for optimism and this is 48 years of data. That’s really concerning, because small business, at least in my view, really drives local communities. When small business owners have a lack of confidence and a lack of optimism, there’s going to be negative repercussions for them. That means that they’re going to not do those investments they normally would.

What can businesses do to cope with inflation in the near term?

FERRUSO: Most businesses have three, five, maybe even 10 year plans. Maybe it’s putting on hold some of the things they were planning to do. It’s cutting back on filling vacancies and open positions. It may be paring back the increased wages they had been offering because if revenue is not coming in, they can’t afford it. The reality is the cost of goods for my members is through the roof. Their number one concern right now is inflation. We’ve been serving our members for 50 years. For the past 40 the number one concern has been cost of health insurance. That’s been leapfrogged by inflation and supply chain issues. They’re going to do things to keep their businesses holding in place. It’s not doing the spending and outlays they normally would do and, unfortunately, possibly paring back from hiring.

What advice for consumers do you have to deal with inflation?

KINSEY: The answer is going to be dependent on where someone is in their life cycle, whether they’re closer to retirement, how much of their budget is dependent on non discretionary items. It’s kind of a two pronged issue for for a lot of people. Unfortunately, in this environment we’ve got a situation where the traditional 60% stocks, 40% bonds portfolio allocation actually lost value. Bonds lost value because of interest rate increases. Stocks haven’t been performing.

If we have sustained 8% inflation, there’s practically no portfolio that’s balanced in any way that can keep up with that. But over extended periods of time, there’s never been a time in history where the portfolio hasn’t been able to achieve the end goals even in situations like this if you keep it fairly balanced. So don’t panic.

If you have adjustable debt, credit cards, that sort of thing, this may be a great time to pay attention to those items. Hopefully, you’ve refinanced your mortgage by now and you’ve got a lower interest rate. So pay attention to adjustable rate debt, pay attention to frivolous expenditures. Airline fares are up 38% year over year, that’s obviously maybe an area to pay attention to.

SHIELDS: Thinking about retirees in particular, 9% of the equities sold in the United States last year were owned by 10% of the people, right? Most working-age people get most of their income from wages. Most retirees are getting that income from Social Security. So I’m not really thinking about folks who are deciding between taking two or three vacations this year, I’m thinking about folks who are trying to buy groceries. Maybe what we need to do is really deepen the investments that we’re making in people, including investing adequately in Social Security. You could do that by getting rid of the income cap. And let’s make sure that the costs fall on the people who are powerful economic actors and can afford to pay for them - not on working people who are trying to get by.

Credit: Cedarville University / Scott Hu

Credit: Cedarville University / Scott Hu