Prices have been going up in a number of segments of the economy in recent months, and the public is taking notice. One indicator of this is that search interest for the term “inflation” is higher than at any point in the past decade.
Recent data from the Bureau of Labor Statistics highlights rising costs across the board, and shows that specific sectors are experiencing rapid price increases this year.
Where is Inflation Hitting the Hardest?
Since 1996, the Federal Reserve has oriented its monetary policy around maintaining 2% inflation annually. For the most part, U.S. inflation over the past couple of decades has typically hovered within a percentage point or two of that target.
Right now, most price categories are exceeding that, some quite dramatically. Here’s how various categories of consumer spending have fared over the past 12 months:
|CPI Category||One-Year Change|
|Used cars and trucks||26.4%|
|Tobacco and smoking products||8.5%|
|Food at home||5.4%|
|Food away from home||5.3%|
|Medical care services||1.7%|
|Medical care commodities||-0.4%|
Of these top-level categories, fuel and transportation have clearly been the hardest hit.
Drilling further into the data reveals more nuanced stories as well. Below, we zoom in on five areas of consumer spending that are particularly hard-hit, how much prices have increased over the past year, and why prices are rising so fast:
1. Gasoline (+50%)
Consumers are reeling as prices at the gas pump are up more than a dollar per gallon over the previous year.
Simply put, rising demand and constrained global supply are resulting in higher prices. Even as prices have risen, U.S. oil production has seen a slow rebound from the pandemic, as American oil companies are wary of oversupplying the market.
Meanwhile, President Biden has identified inflation as a “top priority”, but there are limited tools at the government’s disposal to curb rising prices. For now, Biden has urged the Federal Trade Commission to examine what role energy companies are playing in rising gas prices.
2. Natural Gas (+28%)
Natural gas prices have risen for similar reasons as gasoline. Supply is slow to come back online, and oil and natural gas production in the Gulf of Mexico was adversely affected by Hurricane Ida in September.
Compared to the previous winter, households could see their heating bills jump as much as 54%. An estimated 60% of U.S. households heat their homes with fossil fuels, so rising prices will almost certainly have an effect on consumer spending during the holiday season.
3. Used Vehicles (+26%)
The global semiconductor crunch is causing chaos in a number of industries, but the automotive industry is uniquely impacted. Modern vehicles can contain well over a thousand chips, so constrained supply has hobbled production of nearly a million vehicles in the U.S. alone. This chip shortage is having a knock-on effect on the used vehicle market, which jumped by 26% in a single year. The rental car sector is also up by nearly 40% over the same period.
4. Meats (+15%)
Meat producers are facing a few headwinds, and the result is higher prices at the cash register for consumers. Transportation and fuel costs are factoring into rising prices. Constrained labor availability is also an issue for the industry, which was exacerbated by COVID-19 measures. As a top-level category, inflation is high, but in specific animal product categories, such as uncooked beef and bacon, inflation rates have reached double digits over the past 12 months.
5. Furniture and Bedding (+12%)
This category is being influenced by a few factors. The spike in lumber prices along with other raw materials earlier in the year has had obvious impacts. Materials aside, actually shipping these cumbersome goods has been a challenge due to global supply chain issues such a port back-ups.
How Inflation Could Influence Consumer Spending
Rising prices inevitably impact the economy as consumers adjust their buying habits.
According to a recent survey, 88% of Americans say they are concerned about U.S. inflation. Here are the top five areas where consumers plan to cut back on their spending:
|Money saving action||% of respondents|
|Cut back on restaurant / take-out meals||48%|
|Keep my current technology (e.g. phone, tablet) instead of upgrading||30%|
|Budget food and cut back on grocery buying||29%|
|Purchase less clothing / accessories||29%|
|Put off home repairs, renovations, or home upgrades||23%|
Will Inflation Continue to Rise in 2022?
Many experts believe that U.S. inflation will decelerate going into 2022, though there’s no consensus on the matter.
Improved semiconductor supply and an easing of port congestion around the world could help slow inflation down if nothing goes seriously wrong. That said, if the last few years are any indication, unexpected events could shift the situation at any time.
For the near term, consumers will need to adjust to the sticker shock.
The Accelerating Frequency of Extreme Weather
Extreme weather events, like droughts and heatwaves, have become more common over the years. But things are expected to get worse.
The Accelerating Frequency of Extreme Weather
The world is already witnessing the effects of climate change.
A few months ago, the western U.S. experienced one of the worst droughts it’s seen in the last 20 years. At the same time, southern Europe roasted in an extreme heatwave, with temperatures reaching 45°C in some parts.
But things are only expected to get worse in the near future. Here’s a look at how much extreme climate events have changed over the last 200 years, and what’s to come if global temperatures keep rising.
A Century of Warming
The global surface temperature has increased by about 1°C since the 1850s. And according to the IPCC, this warming has been indisputably caused by human influence.
As the global temperatures have risen, the frequency of extreme weather events have increased along with it. Heatwaves, droughts and extreme rainstorms used to happen once in a decade on average, but now:
- Heatwaves are 2.8x more frequent
- Droughts are 1.7x more frequent
- Extreme rainstorms are 1.3x more frequent
By 2030, the global surface temperature is expected to rise 1.5°C above the Earth’s baseline temperature, which means that:
- Heatwaves would be 4.1x more frequent
- Droughts would be 2x more frequent
- Extreme rainstorms would be 1.5x more frequent
The Ripple Effects of Extreme Weather
Extreme weather events have far-reaching impacts on communities, especially when they cause critical system failures.
Mass infrastructure breakdowns during Hurricane Ida this year caused widespread power outages in the state of Louisiana that lasted for several days. In 2020, wildfires in Syria devastated hundreds of villages and injured dozens of civilians with skin burns and breathing complications.
As extreme weather events continue to increase in frequency, and communities become increasingly more at risk, sound infrastructure is becoming more important than ever.
Blockchain Applications: Tokenization of Real Assets
Tokenization is a future application of blockchain technology, and it could make investing in physical assets much easier. (Sponsored Content)
Blockchain Applications: Tokenization of Real Assets
Did you know that blockchain has the potential to transform the way we invest in physical assets?
Tokenization is a solution that divides the ownership of an asset (such as a building) into digital tokens. These tokens act as “shares”, and are similar to non-fungible tokens (NFTs). The difference here, however, is that the tokens are fungible and they are actually tied to the value of the asset.
In this graphic sponsored by Global X ETFs, we visualize how tokenization could be used in real estate.
Tokenization in Real Estate
Blockchain has strong potential in real estate investing because it mitigates many of the asset class’ hurdles. Here’s a brief round-up of its theoretical advantages:
Buying and selling real estate is normally a tedious process. If a property were to be tokenized, it would essentially cut out the middleman and allow buyers and sellers to transfer ownership directly.
These transfers would be as easy as buying and selling cryptocurrency.
Removing barriers to entry
Because properties are expensive, real estate investing is typically limited to institutional investors with large amounts of capital. Individuals can gain exposure through a real estate investment trust (REIT), but these vehicles can carry high minimums and fees.
Tokenization could enable individuals to buy and sell real estate in small denominations (even fractions of a token) and without traditional fees.
Transparency and security
Blockchains are decentralized, digital ledgers known for their security. Tampering with a blockchain’s data is incredibly difficult because the ledger is shared and verified by all of its users.
This provides investors with full transparency into the past transactions of a property, as well as an undeniable proof of ownership.
If tokenization proves to be effective, it could be extended to a whole range of other physical assets—most of which have their own unique barriers. Consider the following table, which lists the 12-month and 10-year return of various luxury goods.
|Category||12-month return||10-year return|
Source: Knight Frank (Dec 2020)
Rare luxury goods have historically been sold through live auctions, where the highest bidder is awarded ownership. Thanks to blockchain technology, this could change in the future. In fact, Sotheby’s (a 277-year-old auction house) recently began to accept cryptocurrency as a payment option in its auctions.
In short, tokenization has the potential to greatly reduce the barriers around alternative and physical assets. For investors, this means a much wider set of opportunities to pursue.
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