Lately Americans have been experiencing a whole lot of pain. Crippling prices at the pumps, pain at the grocery store and more recently a new strain has manifested itself at Wal-Mart check out counters. But a new development in the global market will have Americans prolonging the agony of high prices for a long time as inflation is beginning to seep its way into the prices of imported goods.
“Emerging markets like those in Asia and South America are overheating. Eventually some of those rise in costs will impact our economy,” said Julia Coronado of BNP Paribas.
The price of oil steel and cotton are rising across the globe. Americans are already numb to the pinch at the pump. But the new threats to American pocket books are the rising prices they pay for food, appliances and clothing many of which come from overseas or use parts made elsewhere.
“We know that households are already feeling pain. Both the Conference Board and the University of Michigan have registered steep declines in consumer confidence last month,” said Bernard Baumohl of the Economics Outlook Group.
Last month the core Consumer Price Index, a measure of changes in the price level of consumer goods and services, excluding food and energy, rose by 0.5 percent. This was the largest gain since June 2009 as well as the second straight month of growth and the quickest rise in the inflation measuring number in more than year and a half.
However, due to droughts, floods and the current unrest in the Middle East, the overall CPI, which includes the cost of food and energy, rose to 2.1. The Federal Reserve Board has said that consumers can and will absorb the price difference. The Fed’s line of thinking can be attributed to the increase in the sources of income that the American consumer has gained since the beginning of 2011.
“Although inflation-adjusted incomes have been increasing, wage and salary disbursements are only back to pre-recession levels,” said Patrick O’Keefe, Director of Economic Research at J.H. Cohn, LLP. In fact if you adjust for inflation wages are down about 4.2 percent, noted O’Keefe.
But the ripple of global inflationary trends has had an effect on the value of the U.S. dollar. The greenback has fallen 5 percent in the last year bringing the value of our dollar to its lowest levels since the Fed began to measure the inflation adjust value in 1973.
This means that everything from Tropicana orange juice that uses oranges from Brazil and foreign cars will begin to see their prices rise. But this will also impact goods Showing that inflation is beginning to spread into more than just food and energy prices.
“People are experiencing sticker shock from food prices as the rise in global demand outpaces supplies,” said Baumohl.
Products made with imported components, such as automobile transmissions and computer chips, also are becoming more expensive. And that means that all the products that use those components, whether they’re made in the U.S. or not, will also see their prices rise as the rising costs are passed down to consumers.
This should be alarming to Americans. The U. S. as a fact imports more than it exports. The U.S. Census Bureau noted that, the country imported $166 billion worth of goods in January 2011, compared with $136 billion in January 2010. This reinforces the Fed’s point of the American’s ability to absorb the increased price of imports- at least for now.
But Patrick O’keefe, Director of Economic Research at J.H. Cohn, LLP, like Baumohl begs to differ. He notes that the increase spending has been due in part the higher gas prices and car sales. According to the Bureau of Labor Statistics, gasoline prices alone were up 19.2 percent from this time last year.
On the other hand, the economist has noticed a change in the behavior of households. Americans are still saving and not spending at the same rate they were before the economic collapse.
“The saving rate has more than doubled since the financial meltdown began. It has not, however, returned to the level that prevailed through most of the post-war period,” said O’Keefe detailing the shift in American spending behavior.
The economist believes American’s have used this extra money to reduce household debt instead of spending. The consumer now has an option of spending and saving noted O’Keefe.
Without spending by consumers the economy has no traction. But the impact of higher inflation on consumers is tied to whether incomes rise to meet it.
“When incomes are flat and prices are rising, generally or based on key factors like food and gasoline, households experience a diminished standard of living,” said O’Keefe.