Despite holding rates steady on Wednesday, the Federal Reserve signaled future rate hikes with its upgraded assessment of the US economy – describing it as “strong” with “solid” growth. Inflation is close to their 2% target based on the Fed’s preferred metric, the Personal Consumption Expenditures (PCE) – while its cousin, the Consumer Price Index (CPI) rose 2.9% year-over-year.
And while the official figures suggest inflation is well in check, Americans seem to be having a totally different experience at home – as rising gas prices and an escalating trade war are already putting a serious dent in disposable income (with $200 billion in Chinese goods at risk of a new, 25% tariff). And while industries tied to discretionary spending such as luxury goods and RV’s have already taken a hit, Americans should probably strap in – as goods exposed to tariffs as well as higher fuel and raw-material costs are set to cause more pain in consumer wallets, reports the Associated Press.
Thanks to steel and aluminum tariffs imposed in May aimed at boosting America’s manufacturing base, steel and aluminum prices have risen by 33% and 11% respectively – trend which could cost the US beverage industry nearly $348 million, according to The Beer Institute.
Meanwhile, higher prices across several industries have already taken their toll on household budgets.
Janette Hendricks said she has noticed higher prices on “just about everything” in the past three months or so. That’s put a little pressure on the recently retired nurse in Washington. So she goes shopping less often, “makes things stretch,” and she always shops for things on sale. She said she has also considered going back to work to have more cushion in the budget.
“The economy is doing great, so why is everyone doing so poorly?” she asked. –AP
And as we reported on Tuesday, Americans are already facing higher prices for key staples. Last week, Coca-Cola CEO James Quincey said tariffs are going to inflate drink prices. “Clearly it’s disruptive for us. It’s disruptive for our customers,” Quincey said.
Proctor & Gamble similarly warned of squeezed profit margins due to higher costs and rising competition. As a result, the prices of Bounty paper towels, Pampers diapers, Charmin toilet paper and Puffs tissues are going up and average of 4%.
Price hikes on other key items are also causing pain throughout the economy, such as gasoline, which has surged over 24% in the last year, while June rents and other housing costs were up 3.4% year-over-year, and auto insurance spiked over 7% during the same period. To cope, people are cutting back wherever they can.
Hendricks said she and her husband also drive far less as they’ve noticed gas prices on the rise. Halla Byer, 28, has also seen the cost of filling up her car go up. The recently unemployed Portland, Oregon, resident feels optimistic about opportunities in the city, but joked of higher prices “making broke people more broke.”
Thanks to rising fuel costs, airlines have been cutting unprofitable flights from schedules, as spot prices for jet fuel are 50% higher than they were a year ago. American Airlines suffered a huge hit to its second-quarter profits, which fell by over 1/3 as spending on fuel surged. In response CEO William Douglas Parker warned about rising fares – while Delta CEO Edward Bastian anticipated prices rising around 4% over last year.
“Pricing is certainly a function of cost, and with higher fuel prices, you’re going to expect to see ticket prices go up as well,” he told investors in July.
Homebuilders are anticipating pain as well, as Tariffs Trump imposed on Canadian softwood lumber (which Canada was heavily subsidizing to undercut US producers), have boosted the average cost of home construction by $7,000 – an increase which will undoubtedly be passed along to home buyers, which may translate to a possible slowdown in home construction. AP notes that both building permits and ground breakings slowed in June, according to the Commerce Department.
“Any higher costs for material comes right out of our profit,” said Randy Noel, a custom builder in Louisiana and chairman of the home builders’ board.
Higher costs mean his company has only sold 30 homes this year, rather than the normal 40. He’s been using fewer subcontractors on projects — which means those workers lose income. –AP
“They’re sitting at home and looking for remodeling jobs,” Noel said.
Real wages stagnating
Meanwhile, real hourly wages have fallen 0.2% in June from a year earlier among production and nonsupervisory employees – a category which includes blue-collar workers.
“It’s the boiling-frog metaphor,” said Marc Hall, a 58-year-old writer and corporate-communications specialist at a software firm in Rockville, Md. “You notice it a little at a time, here and there, and then at the end of the year, you say, ‘Yeah, things went up a lot, didn’t they?’”
Mr. Hall said that while he received a 2% pay raise in the past year, he senses that his earnings haven’t kept up with the cost of living, adding, “It’s a net loss.”-WSJ
Last month, JP Morgan chief global strategist David Kelly noted “Wage growth remains surprisingly weak,” which he suspects is a net plus for producers. “The remarkable ability of firms to lure more workers back into the labor force and get stronger productivity gains from them without raising wages is a clear positive for profits.”
Workers, on the other hand, may find themselves “enjoying” their winter bundled up with a nice hot cup of Ramen noodles.
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