APR 13, 2018
Household inflation is highly personal and depends a great deal on education, medical, and other costs.
But food and fuel are universals. You gotta eat, you gotta heat. You can only cut back so much on either one, making the January year-over-year jump in these sectors the latest indicator that inflation is starting to hit Americans on all socioeconomic levels.
Rising inflation continues to eat into consumer discretionary income, though few are reporting it. Combined energy and food expenditures (in nominal dollars) grew 6.2% year-over-year in January 2018 — near a six-year high.
As a percentage of total personal consumption expenditures (PCE), combined food and energy spending have risen from a low of 10.7% in July 2017 to 11.2% in January 2018 (before easing to 11.0% in February) — with considerable room to move higher.
Understandably, this percentage historically has moved in the opposite direction of the trade-weighted broad dollar index. During the last dollar bear market, from 2002 to 2008, the PCE percentage devoted to food and energy rose from less than 12% to a high of 14.5% (see green arrow below).
Will history repeat? Time will tell, but at the very least, the chart below suggests that the days of easing food and energy costs are over.
It is noteworthy that this increase is happening as the New York Fed’s Underlying Inflation Gauge (UIG) hit another high for this recovery, rising from 3.01% in January to 3.06% in February. The UIG currently implies trend CPI inflation in the 2.2% to 3.1% range. And, as the following chart suggests, the last time the UIG broke through the 3% barrier — on the way up — was in 2004, soon after the beginning of the last dollar bear market.
ORIGINAL SOURCE: The eroding purchasing power of the dollar and its implications for consumption. at 13D Research on 4/4/18