Am I crazy or is bubble tea pricey these days?

My father loved making a deal, especially when car shopping.  When I was in college and ready for my first ‘real’ car, I had my eye on a 4-door black Volkswagen Jetta with state-of-the-art manual sunroof.  As far as I was concerned, that car was mine, but first my dad needed to negotiate the right price. 

A hard-working and self-made Arab immigrant, my father didn’t believe in paying anywhere near the manufacturer’s suggested retail price (MSRP).  He took one look at the sticker price of my Jetta and immediately divided it by two then moved the decimal point over three places as his starting offer.  I panicked; this was a car dealership on Rockville Pike, I reminded him, not a rug merchant in Marrakesh!  But that was only the beginning of an afternoon of stressful negotiations.  After a lot of back-and-forth between my dad and the dealership manager, which included my father walking out and the manager running out to the parking lot to beg us to come back to his office, as well as a much needed grape soda to calm my nerves, my dad agreed to a price and I got my car.

Lately, there are no deals to be made at car dealerships.  Thanks to a high demand for new and used cars, shipping bottlenecks, and a resulting shortage of cars, many buyers are paying $10,000 or more above MSRP.  Even my father would have a tough time finessing a deal.

Since the pandemic has subsided and as the economy reopens, inflation has spiked and it has not only impacted car purchases but many areas of post-pandemic consumer spending, including apparel, airline tickets and travel, dining out, groceries and gas.  Even random items are seeing a price increase, including the price of those tapioca balls at the bottom of your bubble tea. 

How is inflation measured?

Inflation occurs when the cost of goods and services rises, when your dollar has to stretch further than it used to in order to cover everyday costs.  Changes in inflation are tracked by the consumer price index (CPI) which measures the average change of a basket of certain goods and services over time– like food, gasoline, computers, prescription drugs, college tuition and mortgage payments.  The categories used to measure inflation are determined by the Consumer Expenditure Survey (CES) which also quantifies the weight attached to each—basically what goods/services does the average person use and how much of each do we use relative to other goods and services in the same basket.

Inflationary effects

Inflation can result in positive and negative effects depending on where you are in life.  If you are retired and live on a fixed income, high inflation may dilute the purchasing power of your money—so you have to spend more for the goods and services you need. If you owe debt, rising rates of inflation may make it easier for you to pay down your debt as the amount you borrowed is fixed but its value’s purchasing power diminishes when inflation rises.  Especially during these post-pandemic days of labor shortages and worker attrition, many employers are willing to give pay increases that will also meet the rise in inflation in order to attract and hold on to talent.

Inflation after the pandemic

Over the past decade, the average inflation rate has been below 2 %, but in June, inflation increased 5% over the past 12 months, the largest increase since August 2008.  Certainly, there are good reasons for this uptick.  Pent-up demand for dinners out, movie and concert tickets, airline tickets and travel have driven prices up.  In addition, supply chain disruptions caused shortages and delays which also affected prices.  And even as the economy opens, shipping companies are struggling to find workers to unload crates of parts and products that have been stuck at port on freights for weeks and months.

Will it last?

Higher than normal inflation could be a lasting aftershock of the pandemic.  Besides higher prices resulting from a rush to spend on things and experiences post-pandemic, shortages of other items like used cars are caused by supply problems as well as shipping delays and bottlenecks.  And remember that all of this frenzied spending is fueled by lots of cash that had been waiting to be spent during the pandemic, government stimulus and low interest rates/borrowing costs.  While higher than normal inflation could continue to affect certain areas of consumer spending for several years, the spike in inflation we are experiencing now is likely to die down as things get back to normal and demand for post-pandemic experiences softens.

When it comes to investing, stay balanced

In the meantime, it’s important for investors to keep an eye on their budgets as prices of certain goods and services increase.  While higher inflation may cause some stocks to seem more expensive, investing in the market where returns surpass the rate of inflation will help grow your money faster.  As inflation continues to creep up, the Federal Reserve, which sets borrowing rates for banks and has kept interest rates near zero for several years, may raise rates faster than planned.  This move may eventually raise interest rates on bank deposits, but even in a higher than normal inflationary environment, maintaining a diversified portfolio over the long term can help you outpace inflation and achieve higher returns.

In the meantime, it might be wise to hold on to that old Jetta.