Consumers sulk as inflation devours their stagnant income
Posted by: admin in Money and Finance NewsFiled under: Consumer experience, Money and Finance This day, Economic data, Personal finance, Recession
Reuters reports that consumer confidence has hit a 28-year low. That should not come as a surprise. After all, between 2000 and 2007 the median income has dropped from $61,000 to $60,500. But prices have skyrocketed. And with growth slowing — the prospect of layoffs looms large while consumers expect prices to keep rising.
There’s something called the Federal Reserve. And it’s supposed to keep those inflationary expectations under control by raising interest rates to strengthen the currency and keep credit use from going haywire. But the Fed got confused. It thought that by cutting rates from 5.25% to 2%, it could revive a frozen credit market without boosting inflation. Whoops! Now the credit markets remain frozen but actual inflation and expectations for future inflation are both skyrocketing.
Those expectations are rising fast. One-year inflation expectations surged to 5.2% — the highest since February 1982 — from 4.8% in April. Worse yet, five-year inflation expectations jumped to 3.4%, the highest since April 1995. In April this year they were at 3.2%. If there’s any good news it’s this — if the Fed raised interest rates, the dollar would strengthen, oil prices — which are denominated in dollars — would fall, and investors would pour back into U.S. stocks.
The extra investment might actually provide the capital to fuel corporate expansion and create new jobs and income growth. One thing seems certain to me — it’s hazardous to build an economy on a foundation of debt. If the Fed raises rates, maybe we’ll be able to rebuild it on equity instead.
Peter Cohan is President of Peter S. Cohan & Associates. He also instructs management at Babson College and edits The Cohan Letter.
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