Inflation’s Effects Being Felt by Businesses and Consumers Alike

(KNSI) – Central banks are beginning to clamp down on inflation. The Bank of Canada raised interest rates by 0.5%, known as 50 basis points in financial terminology, at a meeting earlier this week. College of Saint Benedict Economics Professor Louis Johnston says he expects the United States Federal Reserve to follow a similar track at its next meeting in early May. Last month, the Fed hiked by 0.25%.

Government data shows that the Consumer Price Index jumped an eye-popping 8.5% compared to a year ago in March, the highest reading since 1981. Wholesale prices, what businesses are paying for raw materials and products they hope to sell to consumers, surged by over 11% last month. Food prices are also outpacing the CPI. All in all, Johnston says it’s enough to alter behavior.

“I think inflation is starting to run through the system and people are changing their spending in response to it. They’re cutting back on some things, and buying cheaper versions of others.”

Retail sales fell in March once you strip away volatile components like gas stations and auto dealers, backing up Johnston’s view. Joe Redden a professor at the University of Minnesota’s Carlson School of Management, gives some tips to grocery shop in an inflationary environment.

His first piece of advice is to always do it in person so that you can see every option available, including some of the deals grocers would like you to miss. Redden also suggests swapping out recognized brand names for generic offerings if you think the alternative passes a taste test. Lastly, Redden says deals will come, but you are going to have to be more patient. When they do appear, buy in bulk if the item on sale is non-perishable.

The bond market has already begun to price in aggressive central bank tightening. US treasuries are having one of their worst years since World War II, and mortgage rates are above 5% for the first time since 2011. Johnston does not believe that’s enough to cause recent price appreciation in housing to reverse, but gains could stall.

He says the next trip to a car dealer might be a shock. Johnston predicts that carmaker financing arms will try to keep interest rates reasonable, however the days of having 72-month or 84-month terms are likely over.

“The car companies had no reason to have short-term loans with super-low interest rates. The value of money today versus five years wasn’t that different. But with inflation, you don’t want to loan money on five-year terms. You’d like to do it on two.”

Spreading out the loan amount over fewer payments means that the amount a borrower would be responsible for each month will rise.

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