Inflation is a term we often hear in the news, but what is it? In economics, inflation is traditionally defined as a general increase in prices and a decrease in the purchasing value of money. The Nobel Prize-winning economist Milton Friedman described inflation as a “hidden tax,” warning that consistently rising prices cut into consumers’ purchasing power, forcing them to earn more (and pay more in taxes) to maintain their lifestyles.
We have been dealing with elevated inflation since the spring of 2021. Many in the media like to compare the current bout of inflation to that of the 1970s and early 1980s. In my opinion, those times were far worse — inflation spiked by double digits and remained high for many consecutive years. In our current situation, inflation peaked at 8% in 2022 and has since fallen to 3.3% for the year ending May 2024. This doesn’t mean prices are falling, just that they are rising more slowly.
Measuring inflation is done in several ways, with the Consumer Price Index (CPI) being the most commonly reported. This index tracks the percentage change in a basket of goods and services we typically purchase. Core CPI, another measure of inflation, excludes food and energy prices, which can be very volatile. Economists tend to prefer the Core CPI measure because they believe removing these volatile items provides a clearer picture of inflation.
The cause of this recent inflationary trend is widely debated. Theories range from pandemic-induced supply shocks to prolonged low interest rates and expansive fiscal policies. It's undeniable that the money supply surged during the COVID-19 pandemic. This rapid increase, coupled with disruptions in global supply chains, has resulted in a situation where excessive money is chasing limited goods and services.Truckee and North Lake Tahoe are not immune to the impacts of inflation. Many of us have noticed the steady rise in prices at our local supermarkets. Whether it's the cost of a gallon of milk or a loaf of bread, our dollars seem to stretch a little less each time we shop. For families on fixed incomes or those struggling to make ends meet, these increases can strain budgets and force difficult choices.
But it's not just food. Housing, an area of perennial concern in our region, has seen its own inflationary pressures. Renters face higher monthly payments while prospective homebuyers find themselves bidding against escalating prices. The dream of owning a home in our beautiful town becomes more elusive as property values soar beyond reach for many longtime residents.
To mitigate some of the inflationary pressures, the Town of Truckee has several programs to help make housing more affordable. One of these programs, Placemate (formerly called Lease to Locals), provides financial incentives for homeowners to lease long term to the local workforce. Recently I was talking with a friend who was a beneficiary of the program. He is a youth ski coach in winter and works the local food scene in summer. He and his partner were faced with a change of their living arrangements and the cost increase was going to make it undoable. Thanks to Placemate, they were able to make a change that far exceeded their expectations.
Business owners, too, are navigating these volatile times. Rising costs for materials and labor mean tough decisions about pricing and wages, impacting both their bottom line and our community's economic vitality. Small businesses, the backbone of our town, must innovate and adapt to remain resilient in the face of these economic shifts.
According to Aimee and Kane Schaller, founders of Elevation Escape, an escape room opening in Truckee this month, inflation had a substantial impact on their project. Kane explained that opening a brick-and-mortar business already carries considerable risk for small business owners. When you factor in the additional risks of inflation and unforeseen cost overruns, that risk becomes significantly amplified. Kane noted that their materials and labor costs exceeded budget estimates by approximately 40%. He was quick to add that their contractors have been great to work with and very accommodating, acknowledging that it’s a difficult situation for everyone involved. Anticipating such overruns in the current inflationary environment, the couple humorously reflected on the rarity of construction projects coming in under budget. To mitigate these challenges, they prepared by allocating twice the budget as working capital.
Jessica Penman, president and CEO of the Truckee Chamber of Commerce, shared similar business concerns. Chamber members have reported rising costs driven by increasing rents and insurance premiums, with the potential for further increases due to state mandates. The chamber is constantly monitoring legislative and regulatory action that could adversely impact business. One such mandate, SB-1446, is a bill that would impose new requirements on self-checkout kiosks in grocery stores and pharmacies, such as a dedicated staff member monitoring no more than two kiosks and tending to no other tasks. This has raised concerns that the bill could lead to higher costs for retailers.
As we navigate these challenging times, it's essential to stay informed and engaged. Understanding inflation's local impacts and available resources empowers us to make informed decisions, whether in budgeting for household expenses or advocating for policies that support economic stability. While Truckee remains a resilient and vibrant community, inflation casts a shadow that touches us all. By recognizing its local impacts and we can preserve our quality of life.
This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. Please consult your financial advisor prior to making financial decisions.
The financial professionals of Pacific Crest Wealth Planning are Investment Adviser Representatives with/and offer advisory services through Commonwealth Financial Network®, a Registered Investment Adviser. This communication is strictly intended for individuals residing in the United States.
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