Energy Prices Will Find Their Way Into Household WalletsDanielle DiMartino
- But context is a must. Consider that in 1999, median income was $57,909. From that point, it drifted down to $52,666 in 2012. It would not be until 2016 that paychecks finally recaptured their 1999 levels, and these figures are nominal, as in not adjusted for inflation.
- Estimates suggest that if current levels are maintained, they will eat away one-third of the tax cut
- The cost to transport goods is soaring and will hit households as never before
- But today we buy our goods online and shoulder the cost of shipping on a per item basis.
‘Tis the season for hitting the road, hoping you don’t get nabbed by the county Mounties in a construction zone (FINES DOUBLED!), and praying a tired trucker doesn’t drift into your lane: this could well be the most packed our highways and byways have ever been with 18-wheelers.
The good news is apparently in the conventional wisdom, which holds that U.S. households are in such great shape they won’t feel the pinch of higher gasoline(AAA says $2.93 for regular today versus $2.35 a year ago and $2.51 in January.) when they pull off the highway every 500 miles or so.
Bank of America Merrill Lynch economists devoted a recent research report to that very subject titled, “Oil Shock: mostly smoke, not much fire.” In their estimation, “Oil prices are likely to continue to rise but we expect only limited impact on growth and core inflation.”
It is true that median income has finally picked itself up – it is pushing $60,000. But context is a must. Consider that in 1999, median income was $57,909. From that point, it drifted down to $52,666 in 2012. It would not be until 2016 that paychecks finally recaptured their 1999 levels, and these figures are nominal, as in not adjusted for inflation.
In the meantime, prices for housing, cars and other necessities have soared. Monthly Retail sales data is in nominal terms. Maybe it was no coincidence that restaurant sales took a hit in the latest April retail sales report, their first monthly decline since November. Could it be that prices at the pump are squeezing millions of households because of what they’re driving? Recall that hordes have flocked to SUVs in recent years thanks to gas prices being so low.
Estimates suggest that if current levels are maintained, they will eat away one-third of the tax cut.Oh, the irony, though we’ve seen this movie before.
Consider that filling up an SUV in Texas runs you about $70. If you’re ‘fortunate’ enough to live in the tax hell they call California, you’re talking about $100 to fill up that same tank. But the implications for households don’t end with the increase in the marginal cost of driving.
Something unique is taking place in the background that will act as a separate drag on households, one they’ve never experienced in the ecommerce era. The cost to transport goods is soaring and will hit households as never before. According to the Cass Truckload Linehaul Index, trucking costs are up 8.2% over last year, a record high.
There was a time trucking costs would bleed through to the cost of consumer goods but be limited given so many goods’ destination was stores and could be spread across a bulk number of products. But today we buy our goods online and shoulder the cost of shipping on a per item basis.That was all good and well when free shipping truly meant free shipping. Notice that little headline about Amazon Prime cost increasing from $99 a year to $119? Call that the tip of the iceberg.
Perhaps a picture would help to illustrate. A helpful note: the scales are proportional. The blue line is transportation inflation, the green line goods inflation, both from the CPI. Over time, as you can see these two series move in concert. Right now, though, they’ve disconnected from each other. The red line is fuel inflation, including diesel. The persistency in fuel prices in recent years suggests goods price inflation will follow. But the story is not that simple – if it was, the blue and green line would be trending together. That is not the case as other factors – labor shortage and demand shock – have caused the spike in transportation costs.
The proverbial game of hot potato is fast at play. Which party absorbs the higher costs decides the contest. Thus far, it’s been the companies with singed hands as profit margins get squeezed.Their best hope is that pricing power for the goods they peddle kicks in and keeps the game alive. Households may beg to differ given services inflation has been pushing 3% for years rendering their pay gains null and void.