The good news is that inflation has been going down for the last several months, and is back down to a rate much closer to “normal” - about 3% as of June. The bad news is that prices are still painfully high, meaning your Paycheck still isn’t going as far as it used to! 😡
So what gives? If inflation is what caused prices to shoot up, and that has now gone back down, why are we all still paying higher prices for everything?
Here are Five Fast Facts on why prices haven’t gone down:
- 👊👊 One-Two Punch - Everything stopped during the pandemic and there were supply chain problems. So, some things got dirt cheap (hotel rooms) and others shot through the roof (food). Most of that has returned to “normal” now…except for the prices. Oh yes, the government also flooded the country with trillions of dollars in cash, basically devaluing the dollar and making each one worth less. That’s what prompted all those interest rate hikes by the Fed.
- 💲 Markup Vs Cost - With all that going on, a key difference needed to understand what’s happening is markup versus cost. The cost is how expensive it is to make a product, but the markup is the difference between the cost and the price to consumers. Think **profits.**
- 🍗 Digging Into Food Prices - A study of food prices from 2006 to 2019 showed that markup on products went up 30%, though prices only went up about 2%, roughly the same as inflation. This is because costs actually went down. This usually results in everyone being happy – companies make more profit, and the prices follow costs down so consumers also pay less – but that didn’t happen this time. Instead, prices still went up a bit, and that set up the double whammy of the pandemic.
- 😱 Price Sensitivity - Prices went up because consumers have become less price sensitive over the last couple decades. That means they are less likely to buy alternative products at lower prices, and more willing to pay more for the things they’re used to. They might complain, but they keep buying! And this allows producers to keep markups (and prices) high even when costs go down.
- 🚙 Service, Please! - Another element of our stubbornly high prices comes directly out of the pandemic. When everything shut down, service industries took a massive hit and consumer spending on those services dropped like Bud Light’s stock price. When the pandemic ended and things opened up again, people spent loads of money on those services – because they COULD! – and they haven’t shown any sign of stopping since! Interest rate hikes don’t affect services much; instead, it’s wages. And since so many companies are struggling to fill job openings, they are having to pay higher wages, which keeps prices high.
🔥Bottom line: It’s basically a perfect storm of inflation and consumer behavior, with maybe just a wee bit of corporate greed thrown in. It’s a nasty cocktail, and one that is still putting a major hurt on our Paychecks. The best thing we can do right now is spend our dollars wisely on alternative products at lower prices, and bring the market back into more normal behavior due to simple supply and demand.
Are you willing to pay more for the same (more expensive) stuff, or have you switched to cheaper alternatives?
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