Breaking Down the Costs: A Look at the Drivers of Today’s Rising Prices
Inflation is undoubtedly one of the culprits, but various sector-specific factors to each industry are also contributing to the situation. Let’s break down the drivers behind the hefty and getting heftier price tags of our everyday needs.
What’s Driving Inflation?
Long story short: everything is so expensive because (1) we are buying a lot while (2) suppliers haven’t recovered from the pandemic yet.
During lockdown, some consumers, mostly white-collar workers, also began spending less and saving more. This resulted in an excess of $2.3 trillion in savings in US households. Once the world reopened, these consumers let loose and spent their extra cash.
This increased demand for goods and services clashed and continues to clash with the lingering supply chain issues from the pandemic. According to a December 2022 survey by the Association of Equipment Manufacturers, nearly all (98%) U.S. manufacturing companies are still experiencing logistical issues, such as global fuel shortages. With this, sellers or suppliers can’t keep up with the current demand.
When will supply chains improve? Logistics managers are split on the answer. Around 19% expect normalcy by 2023; 30% think 2024 is a more realistic timeframe; and there’s also 29% of them who believe things will turn back to normal on or after 2025 — or never. (The remaining 22% were unsure.) In short, it’s hard to say if and when things will be “back-to-normal” in the supply chain world.
What’s Driving the Housing Price Hike?
As with most, housing is expensive in the US partly because there isn’t enough supply to meet the current demand. Since interest rates have gone up due to the Federal Reserve's efforts to curb inflation, current homeowners are less likely to sell their homes. After all, they’ve locked in a lower interest rate and wouldn't get that same sweet deal today. This is resulting in a low supply of homes and high prices.
In 2020, the total value of all US homes increased by almost $2.5 trillion, the largest annual increase since 2005, according to a Zillow analysis. The average US home sold for $403,900 at the end of 2020, which increased to $535,800 by the end of 2022. And it just keeps on going up from there.
It’s unclear when housing prices will come back down again from this steep climb. The silver lining for now: Housing prices are not expected to rise much in 2023, with average home prices predicted to increase by only 0.3%, according to the National Association of Realtors. This will amount to virtually no change, nationally, in home prices this year, according to Lawrence Yun, NAR’s chief economist.
As for rental rates, they are forecasted to grow 3.3% in 2023, according to Berkadia, a commercial real estate brokerage. That’s also a relatively good development compared to the 6.6% rent growth in 2022.
What’s Driving the Food Price Hike?
It's hard to pin down exactly why food costs have gone so high. There are several factors at play. For one thing, the cost of labor is still high, which contributes to higher prices for food production. In fact, the overall cost of food production in the US is expected to go up by 4.1% this year, hitting an estimated $459.5 billion.
Another issue are the droughts and wildfires in the western US, which have led to lower crop yields from farms in that region. This means less supply to meet the demand for food, which drives up prices for consumers. Plus, present here again are the supply chain issues caused by the pandemic.
And if all that weren't enough, the war in Ukraine is also making an impact on our groceries’ price tag. Ukraine is known as the "breadbasket of Europe" and its food exports make up a significant portion of the global market for wheat, corn, barley, and sunflower oil. But the war is disrupting Ukraine's ability to export food and get it to customers quickly, which is driving up prices even more.
All in all, it's not looking great for food prices in 2023. The US Department of Agriculture expects prices to go up by 7.9% this year, which is still a lot but at least a bit slower than the 9.9% increase we saw in 2022.
In conclusion, the main driver of today’s rising costs is time. Suppliers across various sectors in the US haven’t had time to recover from the sector-specific challenges and/or supply chain issues that rose during the pandemic. Meanwhile, consumers have had plenty of time to save up while in quarantine, and are now catching up on 2-3 years’ worth of spending.
As of now, it’s uncertain when the supply chain will return to normal, and when housing and food prices will come down. There are some predictions though that offer hope. Housing prices, rental rates, and food prices will continue to get pricier, but are predicted to do so at a slower pace in 2023. While those numbers might keep going up, it might not be as much of a jump and a shock the next time you check a price tag – a silver lining.
