- Inflation is here to stay for a while.
- Housing, food and energy have all risen dramatically in the past year as a result.
- Higher prices reduce real wages for the average American.
U.S. Treasury Secretary Janet Yellen expects high inflation to remain with us at least through the end of the year. This follows on the heels of the biggest jump in the Consumer Price Index (CPI) since 1981, coming in at a red-hot 8.6%. The three largest components that make up the CPI are shelter, food and energy. Combined, these three components account for over half of the index weighting.
Let’s take a look at the “Big 3” on a year-over-year basis to see just how much they have risen in the past 12 months.
Housing (or shelter) is by far the largest component of the CPI. It accounts for nearly 1/3 of the overall weighting. The cost of housing has risen by 5.5% from a year ago, which is tame compared to the rise in the other components. Housing tends to move more slowly than other prices, especially on a percentage basis given the bigger numbers involved. Indeed, the 5.5% rise in shelter costs marked the fastest yearly pace in over 31 years.
Perhaps a better way for the average American to look at housing inflation is to look at monthly mortgage payments. The National Association of Realtors (NAR) complies a monthly housing affordability index. The latest data is from April and shows an average mortgage payment of $1,717 based on median family home prices and current mortgage rates.
Looking back a year to April 2021 showed the average monthly mortgage payment at $1,184. That means the combination of higher housing prices and higher mortgage rates made the average monthly mortgage payment explode by $533 per month, or 45% higher. Payment as a percentage of income rose from just over 16% to nearly 23%.
Qualifying income, or the amount you need to earn to be able to get a mortgage on a median priced home, skyrocketed from $57,000 to almost $90,000. The average new home buyer is no doubt feeling the full effect of inflation.
Food prices have risen about 10% over the past 12 months. The CPI breaks down food into two groups-food at home and food away from home. Food at home has risen nearly 12% over the past 12 months. This is the largest yearly increase since 1979. The index for meats, poultry, fish and eggs rose the most at a 14.2% pace.
Other food items, such as bakery goods and cereal, continued to advance at almost a similar trajectory. Fruits and vegetables showed an 8.2% year-over-year rise. As such, people are definitely feeling the pinch of inflation at the dinner table.
The average cost of a gallon of gas hit $5 for the first time ever recently. A sharp rise in oil prices along with diminished refinery capacity and seasonal effects led to pain at the pump. Diesel prices have actually risen even more than gasoline since this time last year. Gas prices are up just over 60%, while diesel has risen nearly 75%.
It’s important to consider how widespread higher energy costs affect the entire economy. For example, both Walmart (NYSE:WMT) and Target (NYSE:TGT) noted how the increase in freight costs due to higher fuel costs are crimping their profit margins.
Inflation bites in to the real wages of the average American. Real wages are the change in income adjusted for the change in inflation.
Although wages have risen in the past year, the rise in inflation has actually taken away more than the increase in pay has provided. Real wages are down 3% from a year ago, meaning the average worker feels a little more poor even though their bigger paycheck shows differently.
Combine that with a lower wealth effect due to a drop in the stock market and it is shaping up as a long, hot summer for consumers and investors alike.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.