Here are what I call the “Big Five” of what people spend money on:
- Rent/mortgage 31.50%
- Groceries 8.60%
- New and used cars 5.70%
- Food at restaurants 5.70%
- Utilities 5.30%
- Bonus: Gasoline 5.30%
(Source: National Public Radio (NPR)
In last month’s summary of The Seven Signs of a Changing Economy™ I summarized the following:
- Beef is up +20.10% versus last year
- Meat, poultry, fish and eggs are up +11.90% year over year
- Used cars and trucks are up +31.40% year over year
- Energy is up +33.30% year over year (utilities)
- Gasoline is up +58% year over year
I have left mortgage and Owners Equivalent Rent (OER) for last as they are nearly one-third of Personal Consumption Expenditures (PCE) and are slow to adjust for inflation.
When housing is measured on a year over year basis it has historically taken OER about two years to catch up to the home value increase. Therefore, it is reasonable to expect rents to increase rather dramatically based on the home price surge of the last two years.
Per the Federal Reserve Bank of Dallas, they predict this 31.50% input to PCE to increase +3.80% in 2022 and +6.90% in 2023. This would be the fastest increase in 30 years per the Dallas Fed and could add at least 1.2% additional increase to PCE.
I understand this is likely boring for you to read, but it is very important to understand what it means. To me, it means consumers will be spending more, keeping our economy growing in the process. However, PCE is also the Federal Reserve’s preferred measuring stick for inflation.
This month the Fed’s preferred measuring stick came in hot at +.70% for the month and +9.33% annualized. For perspective the last five years PCE has averaged +1.78% per year!
For now, Americans are earning money, lots of money, as the U.S. Treasury tax receipts are the highest ever at $2.675 trillion, a +19.36% from the Covid low. You only pay taxes on money earned so this stat cannot lie.
Like it or not, that money is being spent on the “big five” to stay alive and we are all paying more for each of the five. That spells inflation.
PCE remains positive, yet in the shadow this Fed inflation measuring stick coming in at +9.33% has caused the Fed to reduce their bond purchases (“tapering”) sooner (much of 2022) in addition to increasing interest rates three times in 2022 to slow this inflation trend.
As always, our team and I are available to discuss this concept with you. Just call, email or stop by the office and say “Hi”!
Respectfully,
James O. Lunney, CFP®
CERTIFIED FINANCIAL PLANNER™ Professional
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Investing involves risk. Loss, including loss of principal, may occur. No strategy assures success or protects against loss. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.