Why consumers should brace for higher prices

Consumers, get ready: You’re about to suffer some sticker shock. Thanks to the post-election surge of business optimism, last year’s rebound in energy prices and a tightening labor market, we learned this week that inflation measures are already rising at the fastest pace since 2013.

Headline consumer price inflation jumped 0.6 percent month-over-month -- double the expected gain. On an annual basis, inflation is rising at a 2.5 percent clip (the hottest since March 2012).   

Should these trends continue, as they appear ready to do, shoppers are going to suffer a surge of higher prices not seen since the end of the last economic expansion in 2007.

It’s not just inflation, but real growth is heating up as well. And that means the inflation surge is no mere flash in the pan.

Headline retail sales rose 0.4 percent in January over December, pushing the annual rise to a level that was last hit in 2014. And the February Empire State manufacturing survey increased to its strongest print since September 2014.

Separately, producer price inflation increased 0.6 percent last month from the month prior, double the gain expected and landing the annual rate at 1.6 percent -- another level not seen since 2014. You get the idea.

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Digging into the consumer price index (CPI, chart above), energy is playing a big role, with gasoline prices up 7.8 percent as we eclipse last February’s energy price wipeout before OPEC started teasing a production freeze agreement that was eventually finalized late last year. But other areas of upward price pressure include apparel, new vehicles, household furnishings, housing and medical care. So the forces are broad-based.

Shelter costs in particular are a big deal because they’re heavily weighted in inflation measures (at about a third of overall spending) and have been rising steadily in recent years. The CPI’s shelter component is rising at a 3.5 percent annual rate -- last hit in the fading days of the housing bubble in 2007.

Two dynamics threaten to precipitate the inflation surge: The long-awaited rise of wage pressure and the ability of businesses to pass higher costs onto consumers via higher prices.

Wages certainly look poised for a move higher, assuming the tepid but steady payroll gains continue. The National Federation of Independent Business survey found a growing shortage of qualified, desirable applicants. The latest numbers show the net share of small companies saying they’re receiving inadequate applicants for job postings rose to 47 percent from 44 percent in December.

Should this hiring tightness translate into higher pay as businesses compete for a diminished pool of quality workers, the temptation to protect profitability will be hard to resist.

So far, this dynanmic isn’t hitting consumers: Only 5 percent of NFIB respondents said they’re raising prices. But that could soon change. 

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.