March 21, 2022,

What’s going on out there?

Spring is here and we continue to move into the ‘new normal” of the post pandemic economy. But we are dealing with some very tricky economic conditions.  We are seeing a round of significant inflation, which is being led by gas prices, there is a falling unemployment rate and yet it’s hard to fill vacant positions.  The war in Ukraine and rising interest rates add to the economic uncertainty.  Here are a few things to consider:

Consumer Confidence

There are several different consumer confidence indicators that track consumer attitudes about the future conditions of the economy and their tendency to save more or consume less.  Check out the Consumer Confidence Index from the Organization for Economic Cooperation and Development.  Anything over 100 indicates a positive attitude by households for future economic conditions.  Under 100 shows consumers are worried.

You can see a big decline when COVID-19 hit hard in early 2020.  We saw an increase of consumer confidence in early 2021 but another fall when we hit the Omicron surge in the latter part of 2021 and now the economic challenges of inflation in in early 2022 has continued the downward trend.

We have to two BIG questions: How low can we go?  Will consumers continue to spend?

Inflation and Interest Rates

Companies are trying to figure out the highest inflation rate in 40 years and decide how much of a price increase to pass along to customers.  Supply chain issues, the demand for higher wages and rising gas prices are the main drivers that caused prices to rise by 7.9% in February 2022 as compared to a year ago. There’s more; housing costs, which make up about a third of the government’s consumer price index, have risen sharply, a trend that’s unlikely to reverse anytime soon.

To avoid price increases, some companies are using a strategy called “shrinkflation” or “skimpflation”.  Simply put, reduce quantities, or offer smaller portion sizes, or cut services. We are already seeing fewer Doritos in the bag, smaller entrees, and no daily housekeeping services at some hotels.  As gas prices continue to go up there will be other adjustments too.  Recently, Uber and Lyft have added a gas surcharge to each ride.

Seeking to stem the inflation surge, Federal Reserve Bank will be raising interest rates several times this year in an effort to slow down demand which is driving up prices. But the Fed faces a delicate challenge, if it tightens credit too aggressively, it risks undercutting the economy and possibly triggering a recession.

For the first time since 2018, the Fed announced a .25% increase of the Federal Funds Rate. This comes as the pandemic and the supply-chain crisis have pushed the price of many goods higher. Food and cars are more expensive, as are transportation and labor costs, making inflation a concern for all consumers and small and big businesses.

The rate increase may impact the demand side of the equation but supply side challenges such as supply-chain gridlock and rising labor-force participation that have been main drivers of price increases and these are things outside of the control of the Fed.  Looking into the future, the Fed predicts inflation to be running at a 4.3% rate by the end of the year.  So be on the lookout to see 4 or 5 more rate increases by the end of the year