NYC taxi driver: I'm barely surviving with business down and gas prices up
New York (CNN Business)Americans have watched prices for everything from diapers to gas go up over the past year. So far, they have kept reaching for their wallets. But what happens when they reach their breaking point?
The pandemic and the supply chain crisis have pushed the cost of virtually everything higher. Food and cars are more expensive, as are transport and labor costs, making inflation the buzzword of the moment.
In February, consumer prices increased at a level not seen since the start of 1982. And odds are it won’t stop there.
“A month ago, we were generally looking at inflation that was primarily in areas that you were spending more on because of the pandemic,” such as cars, housing and home renovations, said Frances Donald, global chief economist and strategist at Manulife Investment Management. “These were more optional types of inflation.”
After a year of soaring costs, the Ukraine-Russia conflict is pushing prices for more essential categories, like food and energy, up even more.
The price hikes Americans are likely to experience in the coming months will be much harder to get around, Donald said.
“We don’t see a lot of what economists call elasticity when it comes to demand for fuel and food. We don’t have a choice. You can’t not eat. You can’t not drive to work,” she said.
Gas and food prices on the rise
The cost of cooking dinner and fueling the car have already shot up over the past year. Gasoline prices rose 38% in the 12 months ended February, while prices for meats, poultry, fish and eggs jumped 13% over the same period, according to Labor Department data.
Now gas prices are rising even further and people are struggling to keep up.
“I try to catch the weekend sales and freeze meat,” Kathy LeGoux, who lives in Palm Coast, Florida, with her husband, told CNN Business. “[I] can’t buy a lot of fish because it’s too expensive now.”
LeGoux, who is in her 60s, is retired, as is her husband. A high cost of living made them move from Nevada to Florida before the pandemic. But the high prices have followed them, she said.
Retirees and others who live on fixed incomes get hit especially hard when prices go up like they have recently.
LeGoux and her husband have postponed home improvement projects and no longer go on road trips, due to the cost of fuel.
“And the gas price rolls into food prices,” she said. “We’re not even talking about inflation any more here. It’s more.”
Soaring food prices are a difficult problem to solve, according to Donald, especially when it’s really a problem of global supply. Russia and Ukraine are huge exporters of grain and fertilizer. With trade hamstrung by the conflict, the global food supply chain has already started to feel the pain.
“The greatest risk facing global supply chains has shifted from the pandemic to the Russia-Ukraine military conflict and the geopolitical and economic uncertainties it has created,” Moody’s Analytics economist Tim Uy wrote in a report Thursday.
For governments and central banks around the world, this is a new challenge for which typical policy changes that were used to fight inflation in the past might not prove as useful. The Federal Reserve’s plan to raise interest rates and combat pandemic inflation, for example, will do little to change the dynamics of the global food supply. That also means it won’t help the financial pain many Americans will feel as prices keep going up.
Consumers’ breaking point
There is some good news: American households are better funded than in previous crises, which should help them absorb some of the price increases. During the pandemic, stimulus checks and altered spending patterns helped many households shore up their savings.
But the more price spikes affect necessary products and services, people will need to reach deeper into their wallets, putting a strain on household finances. This will be particularly hard for lower-income Americans, who don’t have excess savings as a result of the pandemic and for whom gas and energy costs generally make up a larger portion of their spending.
“A 10% increase in oil prices would shave 0.2% from discretionary spending,” assuming a one-for-one response from consumers, said Jefferies chief economist Aneta Markowska.
Since the start of Russia’s invasion of Ukraine, US oil prices have risen more than 11%.
That matters because consumer spending is the single most important driver of US economic growth. If people have less money to spend outside of necessities, that could weigh on economic growth this year.
Even though the pandemic recession is firmly in the rearview mirror by now, economists are growing concerned the US could be heading toward a period of stagflation, during which low economic growth and high prices limit consumer spending.
In short, the inflation situation is a headache for lawmakers and the American people alike.
Meanwhile, questions are arising about the record profits companies have been reeling in during this time of high prices. Last week, the House Financial Services Committee held a hearing on the matter, showing some lawmakers are clearly concerned about corporate profiteering at the expense of working people who are seeing their hard earned money afford less and less.
So far surging prices haven’t driven customers away from their favorite stores, but that doesn’t mean it won’t happen in the future.
Coca-Cola (COKE) CEO James Quincey said in February that consumers will only accept higher prices for so long. And rising gas prices could push people to their breaking point — if they’re not already there. When household finances become strained, nonessential items and big-name brands with a cheaper alternative are the first to go.
“It’s easier to do pricing in a stimulus environment where everyone else is going up,” he said at the time. “It’s much harder when there’s a real squeeze on income.”
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