The Electoral Consequences of Inflation Numbers
And Comments on Gold, Bitcoin, and Upcoming Earnings
This chart, which caught our eye last week, is an appropriate way to start our examination of the resurging inflation we noted in last week’s letter, and the potential consequences of this inflation both for your portfolio and for the political landscape.
The chart shows small business confidence, and remarkably, as you can see, it currently sits at levels below those at the depths of the Covid lockdowns. What could be causing this decline? We think the central culprit is obvious: rising costs for everything most small business owners must have: labor, insurance, transportation and logistics, utilities (especially energy), capital goods, and inputs of all kinds. Sometimes, as in the case of California’s minimum wage hikes, there is a jurisdiction-specific blow that almost seems calculated to drive a certain industry over the edge -- but clearly, small businesses across the country are under high pressure from rising costs. The decline in small business confidence is another indicator ahead of the lagging official inflation data that inflation is continuing to cause economic pain.
Rising Food Prices Problematic for Electoral Incumbents
The role of labor and especially food inflation could be especially significant not just for small businesses but for larger ones as well (note that national restaurant chain Red Lobster is reported to be close to declaring bankruptcy), and for the upcoming U.S. elections.
Under the tenure of the current administration, the price of a standard grocery basket has risen by 21% since January 2021, in contrast to the less than 7% increase during the previous administration. Core services, which make up a major portion of the Consumer Price Index (CPI), have also risen by nearly 19%, with shelter costs alone increasing by almost 20%. These inflation trends are particularly noteworthy given that food expenses had been decreasing relative to disposable income since the 1960s. However, this trend reversed in 2022, with the average U.S. household now spending 13% of their disposable income on food, the highest rate in 33 years.
Even if, as some analysts anticipate, the rate of food inflation cools this year, any future increases could still place significant financial strain on consumers -- to those already struggling, that prices are merely rising more slowly is cold comfort. Surveys show a majority of respondents expressing worry about the potential rise in grocery costs affecting their ability to purchase food. Naturally, the burden of food inflation disproportionately affects lower-income households, which spent an average of 31% of their disposable income on food in 2022, compared to just 8% for the highest income quintile.
Historically, inflation has been a crucial factor in U.S. elections. Current surveys and polls suggest that inflation, particularly food prices, is a major concern for voters as the 2024 elections approach. Despite some economic improvements and a predicted slowdown in food price increases, the lasting effects of rapid inflation in recent years is likely to influence voter sentiment. Of course, even if the pace of food inflation cools, the sharp price rises experienced are sticking; high prices are not declining.
Not Since the 1970s Has An Incumbent Faced Food Inflation Above 5%… and the Precedents Are Not Encouraging
Source: Deutsche Bank Research
Surveys also show heightened concerns across all demographics about future food price increases -- particularly for younger consumers (18–34), who are notably anxious about their ability to sustain their household food needs. This underscores the broader anxiety about inflation persisting despite governmental efforts to mitigate its impacts.
Not Only About Food…
Food is just one component that we track in our Guild Basic Needs Index (GBNI), which we created and began publishing in 2011. When we created the Guild Basic Needs Index, we wanted something unbiased and unmanipulated that would track U.S. price movements of key components that directly impact the cost of essential, basic needs: food, clothing, shelter, and energy. The price movements of basic essential needs drives behavior, and the price fluctuations trickle through the economy, eventually reaching all Americans’ pocketbooks. While the Consumer Price Index (CPI) measures a basket of thousands of goods that consumers buy, our GBNI measures items that underlie the prices of items that people need to live. In these past four years, the GBNI swings have reflected some of the chaos many shoppers have felt. After the big post COVID inflation scare, we saw a sharp deceleration --- and even a drop --- in some prices as supply chain issues were fixed. However, these past few months have seen GBNI once again flash warning signs.
After a year of mostly negative readings, the latest year-over-year GBNI reading is up over 24%
Some price predictability and stability would probably help support flagging business confidence (as discussed above). The type of volatility we are seeing in the prices of basic needs is likely to inspire no confidence.
Behind Gold’s Recent Momentum
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