Turns out inflation might be *your* fault

Shipping lanes have finally loosened up; gas prices are kind of tolerable again; and the Fed has doubled down on its bad-cop routine. So why in the H-E-double-hockeysticks is overall inflation still so high??

I hate to say it, but the biggest remaining culprit may be average joes like you and me.

Remember, interest rates are only part of the inflation equation. The Fed can crank those rates to the moon and back, but they cannot predict exactly how that will affect the behavior of businesses and consumers. At the end of the day, businesses keep raising prices if they think consumers will keep paying them, and consumers keep paying them if they think they can afford to.

It looks like that is exactly what is happening, as US consumer spending has climbed every single quarter since the summer of 2020.  Just last quarter, American Express reported near-record spending among its members, especially in the Goods & Services and Travel & Entertainment categories. Even Disneyland has been scalping its visitors for all they are worth – and getting away with it!

This is a great illustration of how actions speak louder than words. Much as we all like to gripe about things being overpriced, how many of us are actually buying less stuff as a result? Not enough for businesses to feel the pressure, it seems (except maybe those with lower-income clientele).  

And why is that? Well, because consumers are not really feeling the pressure yet, either.

This is where savings come in. As you can see above, personal savings skyrocketed during the pandemic when everything shut down and stimmy checks were all over the place. But while their longevity has certainly been impressive, those savings are getting tapped out fast – now at a 10-year low after 2020’s eye-watering high. Meanwhile, credit card debt is almost fully back to pre-pandemic levels:

Together, these two charts indicate that consumers have at least been spending their actual money rather than racking up huge credit card bills (whew). Hopefully they are about to reduce that spending as savings dwindle, and inflation will follow suit. Let’s also hope interest rates are not too high when that happens; otherwise, things could get ugly.

In any case, the moral of the story is that you cannot control inflation, but you can control your own spending. And now is the time to practice! We may soon get that “soft landing” the Fed is hoping for, but we may instead get a much nastier drop into recession.

Or who knows, maybe inflation will continue for another 18 months! Regardless, now is not the time to sacrifice your savings to maintain your lifestyle – even if everyone else is doing it.