The holidays can be a stressful time; cooking, cleaning, decorating, in-laws and holiday shopping are enough to occasionally bring out the Grinch in anyone, and now families across the U.S. have an added worry – the highest inflation in 30 years.
According to the United States Bureau of Labor Statistics (BLS), inflation has reached its highest point since the onset of the 1990s. Across the U.S., the inflation rate was 6.2% in October, meaning things were 6.2% more expensive than October of 2020. Inflation data for the Tampa Bay area is only available through September and is slightly below the national average at 6.1%. This means average folks will have to dig a little deeper for the things they need the most this time of year: food, gas, electricity and Christmas presents.
It could be worse. For example, Atlanta has the dubious distinction of the highest inflation in the country – 7.9%. While there are plenty of simplistic explanations on social media for what and who caused the spike in inflation, an expert in the field is providing facts.
Huijian Dong is a professor of finance and the academic coordinator for the University of South Florida’s Kate Tiedemann School of Business and Finance. He is also the director of the Merrill Lynch Wealth Management Center at the Muma College of Business. Dong is a Chartered Alternative Investment Analyst, a Chartered Financial Analyst, and his research has been published by numerous finance, wealth, economics and business journals. He received his Ph.D. in economics with a concentration in finance from the University of Delaware.
Dong explained that inflation has spiked for two reasons on both the supply and demand sides of the economy. On the supply side, the pandemic and ensuing disruption of the supply chain have made it harder to get goods to people, especially imports. The demand side is a little more nuanced; it results from an extra money supply and increasing household incomes, and the expectation of inflation.
“When you expect the general prices of goods and services will increase in the future, people will start to demand goods and services that they do not necessarily need to use now,” said Dong. “When you overlap the stronger demand due to the higher income and the strong demand due to the fear of more significant inflation … and from the supply side the shortage of production due to Covid and the disruption of the supply chain, it’s making the gap between the demand and the supply wider.
“Therefore, that caused the current significant inflation.”
Dong said the pandemic stimulus payments from 2020 and earlier this year – and how they were spent – are a factor in some households having more disposable income than usual. However, he puts more emphasis on data from the BLS that shows the hourly wages are higher and there is still an ongoing shortage of workers, noting the job market is good for applicants and bad for employers.
“So, the higher labor income is not just from the stimulation package, but also from the general increase of the wage level.”
What does inflation mean for St. Petersburg?
Locally, Dong explains that St. Pete has a unique industrial ecosystem. The industrial ecosystem refers to the amount of grocery and retail, manufacturing, and hospitality and entertainment industry a medium-sized city should possess. St. Pete is unique in that its industry is overwhelmingly focused on hospitality and entertainment. Inflation has a major impact on the costs associated with these industries, which Dong believes affects the city’s consumption. Furthermore, the pandemic has already had a severe impact on hospitality and entertainment.
On the bright side, Dong makes the analogy that inflation is like cholesterol – it’s not all bad. In fact, he believes it is somewhat hard to tell the difference. While an older person should monitor their cholesterol intake, he explains, heavy consumption is vital for an infant’s health.
“Will it hit St. Pete to a worse extent compared to other types of cities with a different industry structure?” asked Dong rhetorically. “Not necessarily.”
Dong said that residents may find their cost of living has gone up, but the labor force can benefit from higher costs. Benefits can stem from higher hourly wages, along with increased tips reflecting higher prices in restaurants and bars. The labor pool also benefits from increased opportunities and options in the job market.
“These are good things from the employee perspective,” states Dong.
What does inflation mean for the holidays?
With Thanksgiving just five days away, it is likely that people are already experiencing sticker shock at the grocery store. Dong notes the cost of food has generally risen about 25% this year, and with increased holiday demand will come higher prices. He said that is a definite concern for the holiday dinners we love and expect.
As for the correlation between shortages and price increases, Dong explains they are the same from an economics perspective.
“There’s never a shortage as long as the price is high enough,” he said. “And there’s always a shortage if the price is not high enough, from a supply perspective.”
Dong further explains that if stores lock in prices to stay consistent with their image and branding, you might expect certain goods to be unavailable. He does not foresee shortages on higher-end goods but states that shortages can take many forms.
Indirect shortages include waiting longer to purchase or receive specific items and buying an alternative to the brand or item desired. Dong said while people may find a way to overcome these obstacles, they still need to be addressed.
“The fact that people might find ways to get around the shortage does not mean the shortage does not exist,” he added. “It’s just people are smart enough to move on.”
When it comes to Christmas shopping, Dong hopes people will order things and take action well in advance, leaving plenty of room for delivery or having a backup plan in case of shortages. However, he believes this will also continue to increase prices because anytime there is a disruption of normal consumption habits, it creates uncertainty for the supply chain.
Dong points out another notable trend – this is the second holiday season occurring under the effects of the pandemic.
“So, expect some new products and new patterns of consumption coming up for this Christmas season.”
Dong encourages people to be flexible when navigating the holiday shopping season, and stay in control of their personal debt level. He also stresses the need for strict adherence to a household budget and to watch consumption patterns. He relays how during the pandemic, many people spent their time at home focusing on home improvement projects. When combined with a lessening supply, this caused the price of construction materials to skyrocket.
Dong urges people to consider their long-term needs and the increased cost of living when deciding to tackle big projects or expenditures.
“In other words, money will not burn a hole in your pocket,” he said. “It’s always safe to put the money in your pocket.”