Inflation hitting local families, businesses. When will the pain stop?

Inflation, as measured by the Consumer Price Index, increased 7.5% in January compared to January 2021, the largest 12-month increase since 1982, according to the U.S. Bureau of Labor Statistics’ seasonally unadjusted data. In the Midwest region, which includes Ohio, inflation rose even more, jumping 7.9%.

“Price is determined by supply and demand. Supply side, we have experienced bottlenecks due to labor shortages, rising labor cost, global supply chain issues, shortage of and higher cost of intermediate goods, shipping problems and higher-priced imports,” said Mingming Pan, associate professor of economics at Wright State University. “The disrupted supply was met with strong demand.”

Russia’s invasion of Ukraine last week, which sent oil prices surging and prompted economic sanctions against Russia, will likely prolong higher costs at the pump and impact the world economy.

January’s monthly inflation increase was a seasonally adjusted 0.6% compared to December, with increased costs for food, electricity and housing contributing the most to the overall index. The cost of household furnishings and operations, used cars and trucks, medical care and apparel were also among the goods and services that cost more in January.

The CPI measures the average change in cost of items in an established “basket” of consumer goods and services.

The biggest sticker shock in the annual numbers: a 40.5% increase in the cost of used cars and trucks, gasoline prices up 40% and fuel oil costing 46.5% more compared to January 2021.

“What we as consumers, you and I and everybody else, are seeing really quick is the price of gasoline. We have a lot of trucks that deliver materials and different things here,” said Steve Staub, president and co-owner of Staub Manufacturing Solutions of Dayton. “So the trucking and expediting companies have all increased their cost to cover that, and then have added fuel surcharges on top of that to cover the extra cost for them.”

Shortages drive up costs

The semiconductor shortage has had a particularly expensive impact on sales of new and used cars and trucks. Lack of semiconductors disrupted production of new vehicles, leading to shortages that helped drive up those prices 12.2% year-over-year. Some people turned to used vehicles, which also soared in price.

For months some auto dealers have charged more than the manufacturer’s suggested retail price for many new vehicles. More than 82% of new-car buyers paid above sticker price in January 2022, according to Edmunds, a Santa Monica, California-based automotive inventory and information company.

Both Ford and General Motors warned dealers they might face punitive action, including cuts in shipment of vehicles, if they don’t stop charging customers more than sticker price, the Wall Street Journal reported earlier this month.

People also paid 4.4% more for housing, which includes rent, lodging away from home and a calculation of what a homeowner’s equivalent of rent would be, as the CPI does not directly measure the cost of home mortgages.

Those housing costs make up a third of the index, so a continued increase in housing prices and rents will have a powerful impact on overall inflation.

Rental rates skyrocketed in 2021, with rents for units advertised on Realtor.com increasing by an average of 10.1% year-over-year, according to the company.

Supply and demand imbalances will continue to fuel higher rents, which are projected to grow by about 7.1% in 2022, according to the company’s Housing Market Forecast and Predictions report.

Food prices also rose

Not everyone is in the market for a car or needing to find a new house or apartment, but no one can avoid the price increases in food.

In January the index for food eaten at home increased by 7.4% over the year, with meat, poultry, fish and eggs accounting for the largest increases, according to the BLS.

A pound of sliced bacon cost $7.22, which is $1.39 more than a year ago, according to the BLS. A pound of coffee cost 54 cents more, ringing up at nearly $5.14, and a gallon of whole milk went up nearly 32 cents to $3.79, according to the CPI survey of prices.

Bowser and her husband both work and have scaled back spending, but they needed to buy a new Buick Enclave, one of the few vehicles the whole family can fit into. They did not pay more than sticker price, but the Enclave cost about $4,000 more than it would have a couple of years ago, and it costs at least $20 more to fill the tank than it would have 18 months ago, she said.

Prior to the rising inflation, Bowser spent about $200 a week for groceries at Aldi.

“I’d say we are spending closer to $240 or $250,” she said. “You used to be able to get eggs for 80 cents and now you are looking at $1.20 for just a carton of eggs. I probably buy six gallons of milk a week. They’re all milk drinkers.”

Even after excluding volatile energy and food prices, the CPI increased by 6%, the largest 12-month increase since 1982, according to the BLS.

“A lot of people got (pandemic stimulus) checks and felt uncomfortable buying services because services are contact with people. So they bought a lot of goods,” said Tony Caporale, professor and chairman of the University of Dayton Department of Economics. “Buying a lot of goods when supply is kind of limited obviously contributed to higher prices.”

Wages rose, too

The tight labor market drove up wages, Caporale said, but the higher prices made those extra dollars not go as far.

Average hourly earnings, which had been stagnant for years, rose by 5.7% in January compared to January 2021, according to the BLS. But after accounting for inflation, the “real” average hourly earnings declined by 1.7%.

“It’s important that wages at least keep up with inflation, because if not, workers’ buying power falls,” said Michael Shields, researcher at the liberal-leaning, Columbus-based think tank Policy Matters Ohio. “Inflation has outpaced wage growth this past year, so inflation has been harmful to most families.”

The labor shortage did give a big hourly earnings boost to workers in one of the lowest paid sectors of the economy, jobs in leisure and hospitality, which BLS data show increased by 13%, as places like restaurants struggled to fill jobs.

Job switchers benefited more than people who stayed in their jobs, according to the Atlanta Fed’s Wage Growth Tracker, which measures the median percent change in monthly hourly wages compared to the same period a year before. It uses U.S. Census data and does not adjust for inflation.

In January hourly wages grew 5.1%, the largest increase since August 2001, according to the growth tracker. Job switchers saw their wages grow 5.8% compared to job stayers, whose wages went up 4.7% in January.

Wage increases will stay in paychecks on into the future after inflation eases. But just because prices stop rising at an accelerated rate doesn’t mean they will significantly decline, except in volatile sectors like energy or pandemic-related anomalies like used car prices, experts said.

“When demand starts falling, the price of that good would fall,” said Rea Hederman, vice president of policy at the conservative-leaning think tank, The Buckeye Institute, in Columbus. “But I would not anticipate prices in the overall economy to go back to where they were three or four years ago.”

He said companies with higher than anticipated labor costs likely will look for ways to control costs in the future.

“Employers may slow future wage increases, something along those lines,” Hederman said. “That’s a long way off because the labor market is still red, red hot, exclusive of inflation.”

Shields said many companies have done well, even as employee compensation costs have risen.

“Corporate profits have reached record highs in the last year,” Shields said. “This was not the driver of inflation, but I think it reflects the fact that corporations have been better positioned to protect themselves from rising prices — be it supply costs or wages — than working people are. “

Inflation tempers economic recovery

There is plenty of reason to be optimistic about the nation’s economic recovery. The omicron wave of COVID-19 is waning, vaccines and treatments for COVID-19 are widely available, and progress is being made with the supply chain, as the federal government and businesses focus on fixing the problem.

Consider these data points:

But looming over all that positive economic news is inflation, reflected not only in consumer goods, but also in a separate measure of domestic supplier selling prices called the Producer Price Index, which rose 9.7% year-over-year in January. The price of U.S. imports also increased, going up 10.8% compared to one year ago, according to the BLS.

Consumers are feeling it. The University of Michigan’s monthly national Consumer Sentiment Index, which measures consumer’s view of current and future economic conditions, dropped to 61.7 in February.

“Sentiment continued its downward descent, reaching its worst level in a decade, falling a stunning 8.2% from last month and 19.7% from last February,” said Richard Curtain, chief economist for the University of Michigan Surveys of Consumers. “The impact of higher inflation on personal finances was spontaneously cited by one-third of all consumers, with nearly half of all consumers expecting declines in their inflation adjusted incomes during the year ahead.”

Tamping down inflation

When the pandemic began in March 2020, the Federal Reserve cut short-term interest rates to zero and began large scale purchases of Treasury and mortgage-backed securities.

That fueled phenomenal stock market growth and people saw their investments and retirement funds soar. But the pandemic led to millions of people being thrown out of work. There are still 2.9 million fewer jobs in the U.S. and 204,500 fewer jobs in Ohio than in pre-pandemic February 2020.

Congress in 2020 and 2021 approved trillions in pandemic relief and stimulus dollars, including checks that went to most people, and help for businesses and local and state governments.

Pan and Hederman argue that the federal government contributed to inflation by providing too much stimulus, and should have used a more targeted approach to help needy people rather than the broader population.

“The Fed, the Trump administration and the Biden administration all have over-stimulated the economy during the pandemic, which pushed up asset price (meaning) housing and stocks, to abnormally high (levels),” Pan said.

That made people feel wealthier, she said, fueling purchases of goods that were in short supply, and leading people to retire early or otherwise leave the workforce.

Hederman said extra unemployment checks encouraged people to stay out of the labor market and that too much money went to state and local governments.

“There is no question the largesse by the federal government has contributed to the rise in inflation,” Hederman said.

Shields disagrees, saying that government funding led to the rapid economic recovery and lifted 11.7 million Americans out of poverty.

“These policies have not overstimulated the economy. Ohio has not yet fully recovered jobs, the most important measure of recovery for most Ohioans, who get much or all of their income from work,” Shields said.

A new report by Moody’s Analytics looked at the impact of the nearly $2 trillion American Rescue Plan Act approved last March. The funding added more than 4 million jobs in 2021, and its impact on inflation was almost entirely in the first half of the year — before inflation became a major problem when the the worldwide surge of the delta variant severely disrupted supply chains, the report says.

“If there had been no ARP, it would have taken another year for the economy to recover all of these jobs,” according to the report.

Last fall as the economy rebounded, but inflation remained, the Fed began tapering its large-scale asset purchases and signaled plans to raise short-term interest rates. The goal is to slowly remove monetary stimulus and rein in inflation without halting the recovery.

Higher interest rates impact inflation because they slow the economy by cutting investment and business spending, moderate home buying and tend to make the price of imported goods go down, Caporale said.

This situation with Russia has introduced new uncertainty, but those interviewed believe it is likely that inflation will ease this year as the country overcomes pandemic-related economic disruptions.

“The way to curb inflation is to overcome COVID-19. When people feel safe to return to things like restaurant dining, consumer buying patterns will start to return to normal and take pricing pressure off of goods producers,” Shields said. “The things that threaten them are new COVID outbreaks like the omicron variant causing more disruptions, so we need to focus on public health.”

See More: Two Dayton businessmen talk about the impact of inflation on their companies.

Follow LynnHulseyDDN on Twitter and Facebook