Wherever they go, consumers are seeing spikes in prices as they buy everything from homes to insurance to airline tickets.
More likely than not, spiraling inflation will continue to feast on wallets well past 2022, according to a Florida Atlantic University economist.
Around the nation, “the real value of wages for workers will likely fall even further as the Federal Reserve shows no signs of neutralizing worse-than-expected inflation,” said William Luther, an economist and associate professor at FAU’s College of Business.
In a new monthly inflation report, Luther and student Morgan Timmann predict that prices will be 11.8% higher in January of next year than they were in January 2020, two months before COVID-19 took down the state and national economies.
What does that mean for wage earners?
Consider the car, one of the biggest and most important purchases most consumers generally make. For a vehicle that cost $50,000 in January 2020, the cost would rise to $53,060 in January 2023 if the Fed hit is inflation target of 2%. If it averaged 3%, as the central bank forecast last December, the car would cost $54,700 in January of next year.
“At 3.7%, as the Fed is now projecting, it would cost $55,900,” Luther said. “We’re not paying more because the car is any better. It’s the same car. Rather, we’re paying more because the dollars we’re spending are worth so much less.”
The picture doesn’t get any better in other categories such as home-buying, where prices continue to head for the stratosphere, with car insurance and with the price of air travel, which is being pushed by higher fuel costs.
At the moment, it’s hard for consumers to play defense. Although federal and state labor officials note that wages are on the rise in some sectors, as there are more jobs than willing workers to fill them, pay is not rising fast enough to keep pace with prices.
“I think that over the near term it’s pretty clear inflation has outpaced the Fed’s projections and certainly the wages that workers contracted a year or more ago,” Luther said. “Until those workers can renegotiate their wages, you will continue to see the goods and services they can afford with their pay will decline.”
In the interim, there are some measures consumers may take as they re-examine their personal budgets in selected key areas:
Northbound mortgage rates
Home buyers in the nation's hottest real estate markets know that spiraling home prices aren’t reversing course anytime soon. The median price of a home in the tri-county region of South Florida is $547,000, up 37% year over year, according to Realtor.com.
But now, mortgage rates are moving up — toward the rarefied air of 5%.
“The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 4.8% from 4.5%,” the Mortgage Bankers Association in Washington, D.C., reported last week. (A conforming loan is also known as a conventional mortgage which meets standards for purchase and sale by the government-sponsored companies Fannie Mae and Freddie Mac.)
“There is really not much you can do,” said Jeff Ostrowski, a real estate analyst for Bankrate. “Shop as hard as you can for your mortgage and make sure the house you are buying is realistically within your budget.”
Ostrowski, who lives in Palm Beach County, Florida, said he was shocked to see a 2,000-square-foot home in the Lake Worth Beach area on the market for $1.7 million. A teardown “McMansion” was on the market for $1.3 million.
“If a homebuyer is paying $1.5 million or $2 million they are not that sensitive to interest rates,” he said. That’s principally the province of first-time buyers or those seeking to buy a “move-up” home.
“These prices seem ridiculous, but these houses keep selling for prices that are ridiculous,” he said.
Late last week, the MBA reported mortgage applications decreased 6.8% from the week before.
“Mortgage rates jumped to their highest level in more than three years last week, as investors continue to price in the impact of a more restrictive monetary policy from the Federal Reserve,” Mike Fratantoni, the association’s chief economist said in a statement.
“Not surprisingly, refinance application volume declined further, as fewer borrowers have an incentive to apply at rates that are significantly higher than a year ago,” he said. “Refinance application volume is now 60% below last year’s levels, in line with MBA’s forecast for 2022.”
Bundle insurance
With homeowners and car insurance becoming increasingly more expensive to buy, consumers might try to put all of their eggs in the same company basket, says Sarah Foster, an analyst at Bankrate.
“There are lots of ways consumers can trim how much they spend, especially when it comes to auto insurance,” she said. “One of the most important steps to take, and it ultimately gets you the biggest cash savings, is to bundle your insurance.”
On Monday, Bankrate released its annual True Cost of Auto Insurance Report showing that nationally, drivers spend an average of $1,771 a year on auto insurance which is 2.57% of the average household income.
South Florida drivers, the report shows, are spending an average of $3,508 or 5.58% of their annual incomes.
One move to avoid, the report suggests: adding a teen driver to a policy, which “can be the most expensive life event for auto insurance consumers, causing an increase of $2,081 to the average auto insurance premium.”
One move to pursue: find low mileage discounts.
“Obviously, people have been working remotely more frequently than they did a couple of years ago,” Foster said, pointing to the reduction in commuter miles workers have traveled during the COVID-19 pandemic to drive to and from the office. “It’s important to look at other life events and discounts.”
And the most common of advice, she said, is to simply shop around for homeowners, renters and car insurance to achieve the most savings possible.
Planning a trip? Book way ahead
As fuel prices rise from continuing inflation and the Russian invasion of Ukraine, some airlines have made it clear that higher fares are in the offing.
The main countermeasure is to book tickets well in advance, says David Slotnick, senior airline writer for The Points Guy, a travel lifestyle site.
“Flight prices are going up,” he said. “It’s tricky to tie air fares to inflation because they’re so variable by their nature. Demand is soaring and supply is relatively fixed. There are only so many flights an airline can put on.”
Slotnick said air carriers such as Delta Airlines and United Airlines both have forecast higher ticket prices because of higher jet fuel costs. “In mid-March, Delta said they would expect to charge $15 to $20 more per ticket each way.”
“If you’re a consumer planning (to fly) later this year and want to save money, book as soon as you can,” he said. “It takes weeks or a couple of months for jet fuel prices to trickle down to air fares.”
Booking tickets mid-week or during other off-peak travel times such as well before or after holidays usually yields cheaper fares.
“That held true before inflation and that holds true still today,” Slotnick said.
