Transcript:
Marie Marinovich:
Why does it take inflation so long to slow down?
Tom Vaughan:
Yeah, well, it does happen when it gets going. And one of the main things is this wage increase, right. So things cost more employees need to be paid more to be in the same spot. And inflation has actually been growing faster than the rate of wage growth. So roughly seven 8%, you know, inflation, and 4%, four and a half percent increase in wages overall, during that same period, so everybody’s going to start to feel more pinched. But that four, four and a half percent increase in wage is still fairly significant. Because now, you know, going forward, if inflation continues to even stay at the same level, that group is still going to be requiring more money. And of course, now we’ve got this job openings, there’s a lot of them. So that doesn’t give any power to the employer, in terms of trying to price you know, the wages as far as that goes. So you get into the cycle where things kind of keep going and, and it just keeps going up. And that’s what keeps it up and keeps it rolling.
This scenario right now, though, is a little bit different, just in the sense that you’ve got this massive, pent up demand, the households and businesses right now are super healthy. They basically with low interest rates, they’ve refinanced their homes, they have saved money, you know, because they weren’t traveling, businesses have refinance their debt at low rates. And so there’s a bunch of money floating around, going into things and the household level, we’ve had a big overabundance going into goods, things we can order on Amazon would be that a good example. And you know, not as much going into services, which would obviously include travel, right, and those types of things. So that’s going to start to even out I know, a lot of my clients are talking about travel. Now, you know, and this summer, the fall trips are being planned finally, you know, so, and that’ll sort of spread out if there’s tons of money going after goods, and some of it starts to go after services, that basically brings down the demand and that good area, which will help and that’s where a vast majority of our inflation has come but and so this is sort of absorbing all of that money that was put out all of that stimulus money and all of that savings that happened because people weren’t spending on travel, weren’t going out to eat for a while weren’t going to the movies for a while. And you know, people were nervous even and just trying to accumulate. So that’s what takes a lot in this particular case, we kind of need to burn through that money. And making interest rates higher like the Federal Reserve’s doing makes the cost of business, you know, higher.
You know, not as many people can refinance anymore, you know, when it was two and a half to 3%, and everybody was at four or five, they could refinance. Now it’s at five, right, so not going to not going to get money that way, in the same manner as they used to, that should probably slow down the value of home price increases, at least nationally, which will also take some of this out. So, you know, I’ve said the step before, but we had a $36 trillion increase in household net worth, from March of 2020, which was essentially the bottom of the pandemic for the stock market, to the end of last year $36 trillion increase, most of that increase came from stock market gains, and housing gains, we’ve now had an 18% drop from the high right at the end of last year, to the stock market, that takes away trillions of dollars worth of, of you know, household net worth across the board. And now with higher mortgages, you’re going to see a scenario where you start to see possibly the house prices coming down. Just because not as many people can afford it the payment at 5% versus three. And so, but it takes time, right? It takes time for those things to wind through. And right now we just have so much money. The consumer doesn’t care right now. Prices are up, up, up, up, they just continue to buy because they’re, you know, retail therapy is alive and well right now, which is fine, right? I mean, that’s, that’s what’s going on. So it just takes time for that to happen. We did peak theoretically in March so we’ll see if it comes down again. You know, obviously April was lower, you know, is may lower is June lower, you know, then I think that’ll start to excite the market but still takes time for that inflation to work its way through even if it does go down.