Paying More and Getting Less

In the Federal Reserve’s new world of “transitory” inflation, Americans are paying more to get less.

Retail sales were up 0.6% from May to June. According to the Commerce Department, American consumers spent $621 billion on retail goods and services last month. With the big 1.7% drop in May, retail sales remained below levels in March and April.

Meanwhile, price increases in June far outran the increase in retail sales. In fact, they outran retail sales for the entirety of the second quarter. Consumers paid significantly more in every retail category.

• Food bought at stores – up 0.8%
• Prices at restaurants, delis, cafeterias, etc.  – up 0.7%
• The price of gasoline – up 2.5%
• Durable good prices including appliances, electronics, autos. furniture, etc. up 3.5%

These were price increases in just one single month. Overall, CPI popped 0.9% month-on-month in June. So far this year, prices have risen 3.6%.

Since retail sales are expressed in dollar amounts, they reflect rising prices. In other words, just because dollar widget sales increase doesn’t mean people bought more widgets. It could be that they bought fewer widgets but paid more for them. This is exactly what’s happening in many retail sales segments.

Consider gasoline, for example. Gas station sales rose by 2.5% in June to $47 billion. But the price of gasoline also rose 2.5% in June. That means consumers bought about the same amount of gasoline in June as they did in May, but they paid more for it.

Food and beverage store sales ticked up by 0.6% in June to $75 billion. Meanwhile, the CPI for food bought in stores jumped 0.8%, Again, consumers paid more to get less.

Meanwhile, retailers are projected to experience significant cost increases through the second half of 2021 as price hikes continue to bite. According to Salesforce, US retailers will spend $223 billion more in H2 2021 than they did in the same period of 2020. That’s a 62% year-over-year increase. Breaking down the increases, retailers will pay an additional $12 billion to suppliers, $48 billion in additional wages and $163 billion in higher logistics costs.

And of course, at least some of these higher costs will be passed on to consumers. Salesforce VP and GM of Retail Rob Garf told CNBC consumers should expect higher prices. “Retailers will certainly take on some of the burden and consumers are going to feel it as well,” he said.

In other words, don’t expect the Fed’s “transitory” inflation to disappear anytime soon. As Peter Schiff pointed out, companies have likely held off raising prices thus far. But as they continue to feel the squeeze of higher costs and it becomes apparent that this transitory inflation may not be so transitory after all, they will throw in the towel and raise prices.

It is certainly possible that we can finish 2021 with 10% CPI, which would rank it as bad as any of the years that we had during the 1970s. Except 10% in 2021 is not 10% in 1971 or 1979 because this is not your grandfather’s CPI. This is a completely different CPI that is completely rigged and reverse engineered. If we actually have 10% inflation, if we measured prices the way we did back in the 1970s, it’d probably be 15 or maybe 20% inflation.”

And how will companies cope with the rising costs that they can’t pass on to consumers? They’ll be forced to cut costs and that almost always means shrinking their labor force. That doesn’t bode well for a continued robust recovery.

Garf made another interesting observation, saying we are all “willing participants” when it comes to paying higher prices. “We’re willing to spend a little more. I think there’s enough momentum and positivity among people that they are willing to absorb the additional cost all the way through the holiday,” he said.

In other words, inflation expectations are baking into the economy. This is exactly why financial analyst Wolf Richter said Jerome Powell’s temporary inflation is turning into an inflationary spiral.

The first bout of inflation always looks temporary. But during those first bouts of inflation, that’s when the triggers of persistent inflation, namely the inflationary mindset and inflation expectations are being unleashed.”

Powell and others insist price increase are a temporary phenomenon due to economies reopening post-pandemic. This certainly accounts for some of the rises in prices. More significantly, the Federal Reserve has created trillions of dollars out of thin air and injected them into the economy. We have more dollars chasing fewer goods. That’s a recipe for rising prices.

Richter said the bottom line is that prices are rising, and at this point, nobody is resisting the price increases.

So much cash has been created and handed out that price doesn’t even matter anymore. People are paying whatever, even for discretionary purchases that they don’t have to buy.”

As a result, we have price spikes cascading from product to product and service to service.

This surge of inflation is becoming engrained in the inflation expectations of company decision-makers and consumers alike. They’re adjusting to it and in this manner inflation becomes persistent.”

In other words, get used to paying more and getting less.