I came across this really interesting chart today on Bloomberg that depicts 20-year inflation trends by many of the goods and services we consume on a regular basis. Not surprisingly, healthcare and education prices have increased the most over the past 20 years while television and toy prices have decreased the most among the charted goods and services.
Overall inflation for the period 1997-2017 was 55% or about 1.27% per annum, according to the Bureau of Labor Statistics (BLS). Hardly a period of hyperinflation. Rising inflation has been a key concern for many investors since the Federal Reserve began purchasing assets after the last recession, but inflation continued to decelerate according to BLS and BEA inflation indices. With the Fed’s decision to begin the selling process of the assets purchased after the last recession, interest rates began to rise as did inflation expectations. Inflation has modestly accelerated per the BLS and Bureau of Economic Analysis (BEA) indices, but by no means has moved in a way that would be overly concerning.
We know input prices have been increasing, per multiple of the national and regional economic surveys, with many of those increases expected to be passed along to consumers. Whether the passing on of input price increases leads to a meaningful uptick in inflation remains to be seen. One important point to remember is that input prices and prices in general tend to rise at a faster rate in the late stages of a typical business/economic cycle. While we may not be in a typical cycle this time around, I’m not sure input price increases at current levels are any different than what we’ve observed in the late stages of recent cycles.
The wildcard, and the topic of the Bloomberg article, is what impact tariffs could have on price inflation. With tariffs now appearing to be a more probable reality than they may have been just a few months ago, we have to at least reasonably consider their potential impact on prices. In looking at the Bloomberg chart, the most likely items to be subject to tariff related price increases would be televisions, vehicles, software, household furnishings, apparel and toys.
While I acknowledge almost everybody prefers to pay lower versus higher prices, I’m not sure the impact on prices is going to be that dramatic. Here’s a few things to consider:
- Many foreign manufacturers (vehicle, in particular) have set up production in the U.S. so whatever they’re producing in the U.S. won’t be subject to tariffs, according to my understanding.
- There is no lack of substitutes for TVs, toys, apparel, home furnishings, etc… Maybe the product quality one can afford declines but it’s not like consumers aren’t going to be able to purchase what they need all of a sudden.
- Have you looked for a new TV lately? There are so many different brands and sub-brands of TVs. It’s hard for me to believe TV prices are going higher. I suppose they could rise somewhat but consumers will find cheaper substitutes.
- Tariffs are being placed on specific inputs and goods but not on everything by any means. The biggest expenditures for most households are housing (mortgage or rent), healthcare, food, transportation and utilities. Of those items, vehicles and maybe some food items would likely be subject to price increases as a result of tariffs.
- Innovation and creativity may find ways around tariffs that we aren’t currently imagining. This may sound like pie in the sky talk but it’s pretty amazing what individuals and companies can come up with in response to adverse business conditions. Humans are remarkable in that regard.
I’m not trying to minimize the potential impact of tariffs on inflation or Americans’ standard of living. However, I think it’s important to avoid exaggerating their impact until we have more clarity on breadth and magnitude of any potential tariffs. I believe the bigger impact is going to be felt in the global economy and potentially on American jobs in industries that are targets for retaliatory tariffs.
For now, market implied inflation expectations appear to have leveled off. Long-term rates have dropped from their recent peaks, which possibly reflects reduced inflation expectations. Additionally, there are still disinflationary forces at work that may be stronger and more enduring than any of us realize.