Mark Hauser Discusses Inflation’s Impacts on the Economy and Consumers

Mark Hauser, experienced private equity investor, highlights the impact of continued inflation on both the general economy, and customers as a whole.

Unrelenting inflation continues to affect many sectors of the United States economy. Grocery store and gas pump sticker shock are two highly visible indicators of this troublesome trend. Other consumer commodities have also displayed price hikes due to supply and demand issues. Higher labor costs frequently factor into many product price increases.

Inflation has also made it harder for service providers to operate profitable businesses. Many service providers have reluctantly increased prices because their overhead costs have skyrocketed. Other relevant indicators point to a steady decline in consumers’ overall purchasing power.

Private equity principal Mark Hauser says financial market experts have seen signals that inflation may not moderate in the near term. Note that inflation can be beneficial in certain cases. However, there is justified concern about inflation’s negative effects on the overall economy and on consumers’ wallets.

Inflation Surges in Spring 2022

In late April 2022, the United States Commerce Department reported that aggregate consumer spending was higher than expected in March. These collective expenditures, accounting for over two-thirds of the United States’ economic activity, rose 1.1% in March. The February 2022 consumer spending data was also revised to show a more pronounced upward trend.

Consumer goods spending saw a 1.2% rise in March 2022. This increase was mostly based on a jump in energy and food prices. In contrast, spending on motor vehicles dropped for the second consecutive month because of reduced car and truck inventory levels.

Services spending also saw an increase in March 2022, rising 1.1% overall. Consumers spent more of their dollars on restaurant dining, hotel stays, and international travel during the month. Transportation services, recreational expenditures, and healthcare spending also trended higher in March.

For perspective, Reuters-polled economists had predicted that consumer spending would rise 0.7% in March 2022, compared to the actual 1.1% rate. More significantly, the month’s overall inflation rate was the highest in 16-1/2 years.

Concurrently, other relevant data revealed that aggregate employment compensation had experienced its biggest increase in over 30 years in 2022 Q1. Many companies are offering higher wages in hopes of attracting workers in an increasingly competitive marketplace.

The Fed’s 2022 Rate Hikes Have Begun

Taken together, these consumer spending and labor market figures point to an elevated annual inflation rate considerably higher than the Fed’s 2% target number. For perspective, overall prices are rising at the sharpest level since the inflationary 1980s.

Not surprisingly, the Fed has already begun to take aggressive action to moderate the inflation rate. In March 2022, the Fed raised interest rates by 25 basis points. This action marked the Board’s first rate hike since 2018.

During its May 4, 2022 meeting, the Fed announced a rate increase of 50 basis points (or half a percentage point). Several more 50-point rate hikes are expected during 2022, each one designed to further slow the inflation rate.

Fed Chairman Jerome Powell expressed the Federal Reserve Board’s overarching rate philosophy during the meeting’s news conference. He noted that the Fed was taking clear action to bring inflation down, saying that lower-income Americans had been especially hard hit.

“Inflation is much too high, and we understand the hardship it is causing. We’re moving expeditiously to bring it back down…We’re strongly committed to restoring price stability,” he emphasized.

Multiple Economic Factors Cause Inflation

At its most basic, the term “inflation” refers to extended increases in goods and services prices during a defined period. Mark Hauser explains that these elevated prices result from overall higher demand or reduced supply. However, numerous economic factors and market developments can influence both trends.

Pandemic Recovery Plays a Key Role

In summer 2021, inflation emerged as a feature of the United States’ ongoing recovery from the COVID-19 pandemic’s economic slowdowns. The United States government’s multiple rounds of stimulus payments, low Federal Reserve interest rates, and consumers’ release from lockdowns all contributed to higher demand for goods and services.

Not surprisingly, existing product inventories couldn’t keep up with consumers’ buying frenzy. Product shortages and corresponding price spikes were reported for used cars and single-family homes, among other products.

Wide-ranging supply chain problems, magnified by the COVID-19 pandemic, also factored into this complex scenario. As production costs increased, and component shortages continued, fewer goods were now available for sale. This development triggered even higher prices for many consumer goods.

In 2022, supply chain issues and price spikes have seemingly become the norm rather than the exception. However, an economic “wild card” also emerged during 2022 Q1. Russia’s invasion of Ukraine is predicted to contribute to sustained food and energy price inflation throughout the year.

Inflation Can Offer Several Benefits

Mild inflation can be good for economic prosperity. When consumers anticipate that inflation will occur, they buy goods and services before price hikes take place. This increased consumer spending often provides the catalyst for economic growth.

Mark Hauser points out that companies essentially do the same thing. When inflation becomes a significant factor, businesses often undertake capital investments that they would otherwise postpone. While working with private equity clients, he has encountered this scenario many times.

Some investors put their money in gold and similar precious metals during an inflationary period. However, these assets are very volatile, a factor that often negates their insulation from price increases.

Asset Inflation

Rising inflation means consumers must pay more for the same products and services. By acquiring an asset before prices trend upward, a consumer will likely see an increase in the asset’s value. This higher valuation would apply to items such as homes and stocks.

Fixed-rate Mortgages

Consumers with fixed-rate mortgages can benefit from inflation in the long term. If a consumer makes an identical fixed-rate payment every month during an inflationary period, the value of those payments will be reduced over time. In other words, the homeowner is essentially paying less for that mortgage. This scenario assumes the consumer’s income has kept pace with the inflation rate.

Stock Market Investments

Investing in the stock market is another way to benefit from inflation, says Mark Hauser. If inflation causes the price of a product to keep rising, the company that makes that product should also realize a higher market value. Stated another way, holding stock in the company helps to provide a hedge against inflation.

Inflation Can Produce Negative Impacts

Sustained inflation, especially high inflation, can produce negative economic effects. Consumers can also feel the fallout from inflationary pressures.

Increased Cost of Living

Rising inflation requires consumers to pay higher prices for the same goods and services. If their income does not rise accordingly, their purchasing power decreases. Over time, the consumer’s overall cost of living keeps going up. In other words, they are fighting a losing battle.

Lower-income consumers may find that some products and services are beyond their reach. In April 2022, Federal Reserve Governor Lael Brainard acknowledged that fact during the Minneapolis Fed's Spring 2022 Institute Research Conference.

"Today, inflation is very high, particularly for food and gasoline. All Americans are confronting higher prices, but the burden is particularly great for households with more limited resources," she remarked. For reference, she said lower-income households dedicate 77% of their income to basic necessities compared to 31% for higher-income households.

More Expensive Variable-Rate Debts

As inflation continues to rise, borrowers with variable-rate debts will likely see their minimum payments increase. Homeowners with variable-rate mortgages, and those with high credit card balances, are likely to be affected.

Higher Retirement Account Contributions

Retirees are often negatively impacted by inflation. Each retiree must keep increasing the retirement plan contribution needed to maintain the same standard of living. Over time, their retirement savings may continue to lose value. By building a larger-than-needed retirement nest egg, the retiree can help to protect themselves from inflation, advises Mark Hauser.

The Risks of Excessively High Inflation

If the inflation rate remains at 5% or higher, large-scale economic problems begin to occur. The United States economy faced this scenario in 1980, when 14% hyperinflation took hold.

During a hyperinflationary period, the expectation of continued rising prices drives even more inflation. This means that every dollar in consumers’ wallets has diminished value.

The Fed’s traditional response is to raise interest rates, an action designed to slow the inflation rate. However, this action also puts the economy in slow motion. If the Fed implements rate hikes too quickly, a recession can occur. In 1980, then-Fed chair Paul Volcker’s actions were successful in controlling inflation but resulted in double-digit unemployment levels.

The U.S. Economy Continues to Navigate Inflation’s Challenges

In spring 2022, United States consumers and businesses continue to be impacted by inflation. However, the inflation rate has not even approached the 5% level. Hauser Private Equity’s Mark Hauser emphasizes that the Fed is taking aggressive action to moderate the rate’s growth.

Concurrently, supply chain issues drag on, making it difficult to reliably source items ranging from groceries to vehicles. Other economic indicators also figure into the mix. Taken together, these factors signal that the United States economy’s large-scale challenges will likely continue.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.