The inflation you don’t see

Posted by Admin December 17, 2024 Bussiness

YouTubeTV just raised the cost of its basic service by $10 per month—a 14% price hike. If you’re on top of your email, you might have seen the notification. But you won’t see any mention of the price hike where you actually consume the product, on your television or other streaming gizmo.

Consumers have grappled with unusually high inflation for the last three years, an economic burden that may have cost incumbent Vice President Kamala Harris the 2024 presidential election. Harris and her boss, President Joe Biden, have repeatedly pointed to steady progress in bringing inflation down since it peaked at 9% in 2022. But inflation has morphed into a different creature than it was in 2022, and it’s proving difficult to slay.

The overall inflation rate dropped from 9% in June 2022 to 2.4% this past September. That’s almost normal. But it has since ticked back up, to 2.7%, prompting concerns about “reflation.” And it’s not the usual suspects — groceries, gasoline, cars, appliances — that are now driving inflation back up. Instead, it’s services, such as entertainment, insurance, childcare, and haircuts, that are now rising in price by more than incomes.

Services inflation is harder to spot than increases in the cost of items on store shelves, where the price is listed on or near the product. Unlike staples, some services, such as medical care or auto repair, are infrequent expenses where the price isn’t clearly marked in the first place. Insurance is typically repriced only once or twice per year, and consumers don’t always remember what they paid last time.

But families spend nearly twice as much on services as they do on goods, so this inflation definitely bites. Housing is largely a service, and that’s most families’ biggest expense. Care for children and elderly family members is another costly service for some families. Just about everybody knows the sting of medical expenses, especially those not covered by insurance.

For all the focus on food and gasoline prices, services inflation actually surpassed goods inflation all the way back at the end of 2022. Services inflation is now 4.5%, while the overall cost of goods is slightly declining. The whole inflation problem now resides with services.

Rent inflation is the biggest burden in the services category, since it eats up so much of the typical paycheck. Year-over-year rent hikes peaked at 8.8% in early 2023. Rent has since moderated to an annual inflation rate of 4.4%. But that’s still rising by more than incomes, which are growing at just 4%. Rent hikes hurt lower-income people more, since better-off Americans tend to own their homes — and most were able to lower their housing costs by refinancing their mortgages when interest rates hit record lows in 2020 and 2021.

Drop Rick Newman a note, follow him on Twitter, or sign up for his newsletter.

Auto insurance costs have soared during the last year as cars become more expensive to repair and drivers, for some reason, are getting into costlier accidents. Gasoline prices cause drivers far more agita when they spike, since eyes pop out of sockets when the cost of a fill-up rises by $10 or $20. Yet Americans spend nearly as much on car insurance, even if they don’t notice.

Many types of services people depend on are rising by more than the 4% gain in earnings, as the chart above shows. The cost of pet care is up 7.1% year over year. Lawn care, 6.3%. Dry cleaning, 6.2%.

Services inflation may also be more persistent than goods inflation because rising labor costs are a bigger factor. Services, by definition, mostly involve workers performing tasks, and when labor costs rise, they tend to stay up. Most companies don’t cut pay; they just pass higher costs on to their customers.

Goods prices are more likely to decline. Sometimes, input prices decline, especially energy, which is an important contributor to the cost of manufactured goods and food. When competition works, it forces producers to pass lower costs on to consumers. That has actually been happening in some product categories. The cost of electronics is down 3.5% year over year, for instance. Furniture is down 1.8%. Appliances, down 1%.

Incoming President Donald Trump promised voters he’d get inflation down, and he’ll inherit an economy in which the price of goods has generally stabilized. The biggest risk to the outlook for commodity prices may actually be Trump himself. He wants to impose new tariffs on imported goods, which is a tax that directly raises costs. He also wants to deport millions of undocumented workers, which could raise labor costs — and prices — if they’re replaced by workers who demand higher pay.

As for services inflation, Trump hasn’t said how he’ll address that, and it’s not clear that he can. Trump’s best hope on that may be that voters cheer the falling cost of gas and bacon and don’t really notice their insurance or medical bills. Or they save so much at the store that they simply don’t mind paying.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on X at @rickjnewman.

Click here for political news related to business and money policies that will shape tomorrow’s stock prices.

Read the latest financial and business news from Yahoo Finance