4 Things to Know About Inflation

ASHEVILLE, N.C. — The inflationary situation that the United States is facing today is affecting convenience-store consumers and their spending, said David Nelson, founder and president of Bellingham, Wash.-based Study Groups.

Nelson spoke in August at CSP’s Outlook Leadership Conference in Asheville, N.C. He shared the factors that led high inflation, what the real costs of inflation are, how it affects consumers and more.

Here are some additional highlights from his discussion ...

There are four “ingredients” that led the country to the relatively high inflation that it’s experiencing today, Nelson said. Those are:

• The Federal Reserve cut interest rates to near zero, which created high demand for mortgage and business loans.
• The federal government enacted a series of stimulus payments to businesses, households, nonprofits and government entities that raised income.
• Plant shutdowns in the United States and Asia combined with a shift toward goods purchases from services created sever shortages of some products.
• Russia’s invasion of Ukraine disrupted global energy and agricultural markets.

“So we put all that together, and we see that inflation in June is measured by the Consumer Price Index at 9.1%, the highest level in 40 years,” Nelson said.

Much of what’s driving this inflation is energy related, Nelson said. Big year-over-year increases in gasoline was up almost 60%, airfare was up 34% and household energy was up 22%.

Consumers are becoming more price sensitive, he said, showing a chart with U.S. Bureau of Economic Analysis data that compares the relationship between the relative gasoline price and gasoline as a share of total spending.

From 1982 to 2000, when there was a doubling of gasoline prices, it meant that spending on motor fuel as a share of total consumer spending almost doubled. However, there was a much flatter slope from 2019 to May 2022, indicating that consumers have become more responsive to rising gasoline prices in recent years and are buying less as gasoline prices rise.

“I’m not sure why that’s true, but maybe consumers with working from home and so forth have more flexibility than they did in the earlier period of time in choosing to drive or not to drive,” he said.

Why should we be worried about inflation?

Nelson listed what he sees the costs of inflation are, for consumers and businesses:

• The costs of changing prices frequently.
• The costs to reduce money holdings to avoid inflation tax.
• Relative price distortions as prices are raised at different times.
• Unfair tax treatment.
• General inconvenience, like it being harder to compare prices or do financial planning.
• Increased uncertainty with high inflation as it is usually more variable.
• Arbitrary redistribution of purchasing power form lenders to borrowers.

Inflation is weighing heavily on consumers, Nelson said. Dealing with inflation is viewed as the top priority that consumers want Congress and the president to deal with.

Eighty-three percent of Americans describe the current economic situation as “poor” or “not so good,” Nelson said.

How is that affecting consumer’s purchasing choices?

Nearly half of consumers said that because of rising prices on everyday necessities, they were switching to cheaper alternatives, Nelson said, citing a survey released in July by the National Retail Federation.

Some categories affected were alcohol and cigarettes.

In the four weeks ending on July 2, economy beer sales rose 5.4% as compared to a 1% rise in total beer sales, Nelson said. And about 90% of Marlboro customers don’t switch, but 10% will trade down to a cheaper brand. Marlboro gained market share during the pandemic but has more recently lost market share, he said.

When we look at gasoline sales, over the last year, premium sales have dropped from 10.6% to 8.6% of gallons sold, and midgrade has dropped from 7.1% to 6.5% as people have traded down to try to economize at the pump, Nelson said.