More Inflation Concerns
I submitted an article a while ago titled “Is Our Current Inflation “Transitory.” The Central Bank keeps reassuring us that it is; however they have been extending their projections as of late. Let’s take a look at some of the things happening all around us so we can see the broader picture of what the future outcome might bring:
- It was recently estimated that our current inflation is costing households an additional $175 per month. For the average homeowner, that amounts to a hidden tax of $2,100/year.
- Oil prices are up 65% this year, reaching their highest point in seven years last week. Gas at the pump is close to $5.00 in California and parts of New York City. Nationally we are now at $3.27 per gallon, according to AAA. In New Hampshire, gas prices went up more than 7 cents this past week alone, with prices at $3.11 per gallon. Oil prices were depressed when the pandemic shut down the economy in 2020. Now I’m hearing some forecasts for $100 oil. Right now, oil is trading above $80 per barrel for the first time since 2014.
- Normally it’s oil that leads to an energy crisis; however, if you look at natural gas prices…they have increased more than 112% since January. Supplies are short in Europe and Asia for natural gas. Additionally, coal prices have been rising with short supplies as we read about a power supply crunch in China that uses coal to generate their electricity. The immediate impact of higher energy costs is higher inflation which creates a huge drag on consumer spending.
- I just heard today the port of Los Angeles will shift to 24/7 operation to ease the supply chain bottlenecks for the next 90 days. Hundreds of ships are piling up, unable to unload their containers, all contributing to our inflation number. 2 years ago, it was reported that it cost approximately $2,000 to ship a container from China. Now the cost has increased to $13,000 to ship to the west coast and $19,000 to ship to the east coast. This morning, I heard on the news that the truck driver shortage has worsened the supply chain backup. It was reported that Nebraskaland Trucking Company, a large national shipper, was offering sign-on bonuses of $8,000 plus a referral bonus of $4,000 because of the tight labor market and shortage of drivers. Think of what this does to inflation.
- The IMF warned yesterday that the Federal Reserve and others should be prepared to tighten policy and that there’s “high uncertainty” around the inflation issue. The IMF stated, “Central Banks should be prepared to act quickly if the risks of rising inflation expectations become more material in this uncharted recovery.” We all know that fed officials have said the main weapon to combat inflation is raising interest rates, and our central bank has not raised rates since 2018. With inflation running at a 30 year high in our country, many of us wonder if the Fed will be late in raising rates.
- Between government epic levels of debt, corporate debt, and consumer debt, our country is more in debt today than it has ever been historically. This excessive debt is a financial time bomb that could potentially lead to defaults, which could impact the stock and housing markets. Today’s excessive levels of debt are a driver of the government policies that cause inflation.
- We have experienced record fiscal deficit spending combined with record monetary stimulus due to the pandemic. In the spring of 2020, we started seeing trillions of dollars in stimulus packages where the US Government and the Federal Reserve cooperated to print money and distribute it to consumers to spend. Today we’re seeing continued spending measured in trillions. At what point do we see a devaluation in our dollar.
- There is an enormous labor shortage in the US right now. Baby Boomers are retiring in droves. According to Oxford Economics, an estimated 2 million workers have retired since the beginning of the pandemic. At the same time, minimum wages have been increasing plus extended unemployment benefits; look at just our local papers in the help wanted ads. Large signing bonuses and wage increases are commonplace. It was announced last week that a record 4.3 million workers quit their jobs in August. According to the labor department, Bar and restaurant workers and retail employees were quitting in droves. This is the highest number in a data series that goes back to December of 2000. According to Jenn Lim, CEO of Delivering Happiness, around 11 million people quit their jobs over a 3-month period starting in April 2021; many of them didn’t have another job lined up.
- Every day things are getting slammed by inflation. Cotton prices hit a 10 year high last Friday, touching levels not seen since 2011. The price of this commodity rose 47% year to date. According to the UN Food and Agriculture Organization, global food prices shot up nearly 33% in September 2021 compared with the same period the year before. It’s higher today than for most of modern history. From steel and copper to corn and lumber, commodities started 2021 with a bang, surging to levels not seen in years. At the same time, the Federal Reserve seems not overly concerned about inflation thinking it’s transitory, meaning the economy could be left to run hot, which will rev up demand and inflation even more. Costs for corn fed to livestock have doubled in the past year, and soybean meal is 83% higher. This causes farmers who raise poultry, pigs, and cattle to panic and get squeezed by the run-up in grains. How about that nice Arabica coffee at Starbucks…futures have risen about 33% in the past year while raw sugar has also advanced 54%. Wheat prices have hit the highest since 2013. We’re seeing big surges in travel and transportation categories, used cars, trucks, boats, and car rentals.
- Because of the hottest US housing market in recent memory, rising costs and shortages of building materials and labor are impacting the new home building industry. I remember in May when lumber futures were at $1,670 during its peak. Now they are just over $600. However, it’s still 10% higher than last year. Contractors tell me doors, steel components, roofing, windows, cabinets, and concrete foundations have gone up well over 20% the past year. Add to that increased wages for carpenters, plumbers, electricians, and site contractors for infrastructure, and you come up with staggering price increases.
- For the State of New Hampshire, the median sales price hit $405,000 for the first time ever at the end of the third quarter in 2021 compared to $349,253 for the third quarter in 2020, a 16% increase. However, closed sales in units were down 9.7% because of the shortage of inventory. In Belknap County, for the same period, the median price was up 9.7%. However, closed sales were down 25.8%. Again because of large inventory shortages. Carroll County was up 27.8% in median prices and down 18.1% in unit sales. Pending sales were also lower, with Belknap County down 16.4% and Carroll County down 16.6% as of the third quarter because of low inventory. The market is beginning to stabilize and soften a bit from its frenzied high.
- During inflationary periods hard assets can be a safe haven because it costs so much to build and reproduce. That’s why real estate is in such high demand these days, along with other reasons (low-interest rates, limited inventory, and huge demand.)
- The hidden tax is that inflation is outpacing wage increases. Inflation is running at 5.3%, whereas wages have increased by 4.6%.
We have the S&P and Dow Stock Market hitting record highs in 2021, Wall Street rushing IPO’s to market at the fastest pace on record, SPAC’s becoming more popular, bonds with a high risk of default are trading at historically low rates, Russell 2000 companies with no income and crazy speculation in the cryptocurrency markets taking place. Bitcoin, Ethereum, Dogecoin, Polkadot, Cardano, Tether, XRP, Solano, Altcoin, Litecoin, Chainlink, Binancecoin, Monero, non-fungible tokens (NFTs), and numerous other cryptocurrencies have been created, leading to worldwide speculation. Lastly, we have a real estate market at all-time highs feeding on helium and inventory shortages.
All of the above markets appear to be hitting record highs at the same time, and no government in the history of the world has spent as much money as we are today. What we do know is that speculative periods do not always come gently to an end. At some point in time, something is likely to break. I found it very scary when I read an article 2 days ago title “America Needs Higher, Longer-Lasting Inflation” by Karl Smith published in Bloomberg and The Washington Post. That idea would not send us in the right direction.
Let us all hope that some “Black Swan Event” does not show up and trip the elusive circuit breaker. It appears the Fed is in a precarious position and is somewhat trapped if they hike rates or if they do nothing…. time will tell.
This article was written by Frank Roche. Frank is president of Roche Realty Group with offices in Meredith and Laconia, NH, and can be reached at (603) 279-7046. New Hampshire housing stats are from NHAR.org. Please feel free to visit www.rocherealty.com to learn more about the Lakes Region and its real estate market.