Income And Inflation — Americans Getting Screwed In 2013

Despite boatloads of propaganda about "the recovery" in America's economy, two deplorable trends will continue in 2013—disposable incomes for everyone who isn't rich will continue to decline and "consumer" prices will continue to rise. I touched on this subject on December 27, 2012 in Disposable Income Isn't Coming Back Anytime Soon, and today I want to follow-up.

Regarding real (inflation-adjusted) and nominal income, Doug Short has put together a good chart showing the seemingly inexorable trend.

The stunning reality illustrated [below] is that the real median household income series spent most of the first nine years of the 21st century struggling slightly below its purchasing power at the turn of the century. Real incomes (the blue line) peaked at a fractional 0.8% in early 2008, far below the nominal illusionary peak (as in the money illusion) of 27.5% six months later. Also the real recovery from the trough has been depressingly slight. In fact, the trend since the post-trough interim peak in December 2011 has been one of slight decline, although we may be seeing bottoming process underway. Time will tell.

Percent change in nominal and real median household income, From Doug Short's Median Household Incomes: The Real Story

The "money illusion" refers to the confusion people have between the face value (nominal value) of money and the purchasing power of that money. In short, a $20 bill is still a $20 bill, but that $20 does not buy as much stuff as it did 10 years ago. It is almost inconceivable that the "Real Shrinkage" shown above could be reversed in 2013. The purchasing power of your money will continue to decline.

The "official" CPI inflation (including food and energy) will likely continue in the 2-4% range, which will lead to more shrinkage. Right now, we're at the low end of that range.

Chart from Tim Iacono (December 14, 2012)

It is natural to speculate about what items will go up in price this year as your income shrinks. These predictions for 2013 are from dealnews. This list is incomplete.

• The U.S. Department of Agriculture predicts that "food at home" costs will rise 3-4% in 2013. "Food away from home" costs will rise 2.3-3.5%. Meat, poultry and dairy prices are expected to rise, and cereal and bakery product prices will rise too, as a result of the 2012 drought and lower wheat yields.
• Obamacare not withstanding, employee health care premiums are expected to rise an average of 6% in 2013, according to Aon Hewitt, a human resource consulting firm. That amount will vary by state and type of plan, but overall, employers will face higher premiums and the increased cost will be passed along in part to employees.
• Move over gold, it's copper's time to shine! Copper prices could be on the rise thanks to a move by the SEC to approve a fund to trade the metal. The fund could lead to scarcity and higher prices, as it did for gold. The problem is that copper is used in plenty of consumer items, including residential water pipes, wire, pots, and kettles, as well as equipment for brewing beer, distilling liquor, and making candy.
• The U.S. smartphone market has long been subsidized by service providers, offering phones at reduced prices with the signing of long-term contracts. In 2013 T-Mobile will eliminate the subsidy and charge full price for its phones. While there's evidence to suggest that the carrier will in turn allow users to opt for cheaper service rates (thus saving money in the long run), the pill of a full-price phone may be hard for many to swallow.
• While tuition costs are always on the rise, state schools in particular are feeling the pinch. As education costs continue to increase, many states will no longer be able to subsidize much of its students' tuition costs. Meanwhile, student aid and grants aren't rising commensurate to costs, which means university expenditures — more administrators, new dorms, and additional property — will get passed along to students. Tuition and fees for private universities aren't increasing as much in 2013 as they have in recent years, but they are expected to rise for public 4-year colleges. Students can expect in-state tuition to increase 4.8% and fees to rise 3.7%, according to the College Board Advocacy & Policy Center.
• While somewhat unsurprising, 2013 will see a 4.5% to 4.9% hike in shipping costs from both UPS and FedEx, the latter of which is slated to raise rates beginning January 7. Higher shipping costs may affect customers who predominately shop from "independent" sellers, like those found on eBay, etsy, and the like, but it may also have an impact on retailers that presently offer free shipping. Since merchants end up paying for the handling and delivery of orders that "ship free," the increased UPS and FedEx rates may affect the frequency of, and threshold at which, online orders receive free shipping in 2013.

We are constantly told by the Federal Reserve that inflation is not much of a concern; they are worried about deflation. Consequently, regarding "core" inflation (leaving out food and energy), we are expected to swallow this kool-aid—

The Federal Reserve, in what analysts called a watershed move, set out new thresholds Wednesday on the level of unemployment and inflation that must be in place before it would contemplate higher interest rates.

At the same time, the Fed announced a new [monthly] $45 billion bond-buying program in fresh action to keep the recovery going in the languishing jobs market.

But it was the thresholds that surprised Fed watchers.

Fed Chairman Ben Bernanke and his colleagues agreed, for the first time, they would hold rates close to zero while the unemployment rate is above 6.5% as long as inflation is not projected to rise above 2.5%. Longer-term inflation expectations must be well-anchored, the Fed said.

In other words, as long as the jobless rate is above 6.5% and core inflation expectations are low (2.5%), the Fed will continue to pump money into treasury bonds and mortgage-backed securities, and keep interest rates near zero. However, there is no good reason to believe that a lower jobless rate will reverse the trend in income. The "official" unemployment rate has fallen from 10.1% in October, 2009 to 7.8% in November, 2012, yet median household income declined 4.2% in 2007-2009, and 4.1% in 2010-2011.

The problem with this nonsense is that inflation targets in a context of declining incomes promises to further reduce the purchasing power of your ever-shrinking pile of dollars. If we throw in food and energy, the situation gets even worse. Americans are getting screwed at both ends (income and prices).

On the other hand, if deflation were allowed to run its course, and the purchasing power of your dollar were to "swell" in words of Irving Fisher (1933), at least you would have a small hedge against declining income. That is not to say that incomes might not decline even further if prices were to fall to their "natural" level.

U.S. economic policy, as expressed in the Fed's "watershed" monetary policy, is thus utterly perverse. Ironically, all of this is meant to jumpstart an economy whose battery died four years ago. It is easy to see that Americans will be screwed again in 2013 just as they have been over the last 5 years.

Comments

[Toozy]

Wow, household income declined less than 8% for 12 years, isn't it amazing considering oil price increase several fold ?! We definitely have much more surprises on the downside in a future. Food, shelter and energy cost reaching 80 - 85% of the disposable income of average household in the next 10 year will be a realistic estimate.