Commentary
“Inflation cooled, lower than expected,” read the financial press on the release of the Consumer Price Index (CPI) for July. The focus tends to shift based on whether month-to-month changes are up or down. In July, the headline emphasized the 12-month trend, even though the data showed an increase from June to July.
The Consumer Price Index (CPI) is mainly influenced by housing but fails to capture the full picture. By relying on metrics like Owners Equivalent Rent, it overlooks crucial data on housing prices. Despite its limitations, the CPI still provides some insights, albeit skewed towards portraying a rosier picture than reality.
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Two-thirds of people say that the number one issue they face is the cost of living and paying their bills. The typical American is spending nearly $1,000 more per month compared with three years ago just to pay living expenses. That is according to Moody’s, but it also fits with the intuition we all have. It suggests a dramatic decline in real household income, despite what the Bureau of Labor Statistics claims.
The survey further reports that a third of Americans say that they have to take an additional job to make ends meet. This has disproportionately affected Latinos and black Americans and those under the age of 45.
Nearly 70 percent report that they have cut back spending on entertainment, changed their grocery buying, and otherwise stopped with the extras like vacations and trips. Three in five say they have cut back on driving. Two-thirds are putting bills on revolving credit cards charging more than 20 percent. These trends show no change despite the seeming taming of inflation.
Inflation has been raging for years, but it is easy to slip into denial or believe that the price increases are going to reverse themselves. This was certainly the case from mid-2021 and following, as people were told that the price trend was transitory, a word that sounds a bit like temporary. Many people believed it and tried their best not to change their spending and lifestyle habits.
Three years in and the hard realities of accounting are hitting nearly everyone. The effect of this is cascading through every sector as spending on extras is culled across the board.
I was speaking to a journalist for a New England local paper that had always been supported by advertisers, including arts venues. But following lockdowns, arts institutions never really came back. Traffic at major museums is half what it was, and philanthropy is down as well. That leaves less in the budget for advertising.
Many large companies are posting dreary sales outlooks, including Starbucks, Home Depot, and McDonald’s, as consumers are increasingly tapped out. There is a great deal of fear and uncertainty extant among consumers and producers alike. It’s been a rude awakening.
Consumer sentiment has never recovered its January 2020 highs, and instead has fallen by a third.
For the better part of 45 years in this country, we’ve mostly experienced what we can call good and prosperous times with some bumps along the way. The trouble traces to the way government policy has handled these bumps.
The injection of more liquidity into the system has been used to address economic challenges, preventing significant damage caused by credit expansion.
Unlike in 1982, when recessions were accepted as a necessary step for recovery, the approach now is to use monetary measures to eliminate the business cycle altogether.
One of the most aggressive interventions occurred in 2008, when the Federal Reserve intervened by purchasing failing mortgage securities and recapitalizing banks. This decision, while appearing to be a solution, actually exacerbated underlying issues, leading to the expansion of the housing bubble into a broader corporate and financial bubble.
The Federal Reserve’s balance sheet has grown to unsustainable levels, adding to the monetary base. The unraveling of this situation poses a challenge with no clear solution in sight.
The current situation in the United States mirrors Japan’s struggles from a decade ago, with limited options to address a crisis without causing further instability in global financial markets.
Continuing to rely on injecting liquidity to solve economic problems, as seen in recent years, is not a sustainable approach. Eventually, economic downturns serve a purpose in cleansing markets, encouraging responsible consumer behavior, and eliminating unviable projects.
The future may hold a slow and unnoticed crisis, rather than a dramatic event that many anticipate. It is crucial to recognize the importance of allowing economic cycles to run their course to ensure long-term stability.
Please note that the views expressed are the author’s opinions and may not necessarily align with those of The Epoch Times. Please rephrase.
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