EXPLORING THE INFLATION DISCONNECT IN ECONOMIC FORTUNES

BY ED MOLDAVER

Inflation, a term synonymous with rising prices, has been a major talking point globally over the last three years. Its impact, however, has been uneven, benefiting some while leaving others in a precarious position. This article explores the disconnect in economic fortunes created by inflation, focusing on its effect on different sections of the population, specifically in the context of food and energy prices.

Recently, inflation’s most significant impact has been felt in the realms of food and energy. The prices of these and similar necessities have soared, primarily due to global supply chain disruptions, political unrest, environmental factors, and most importantly, reckless spending. This surge in prices has had a disproportionate impact on the population.

One half of the country, lacking substantial assets, finds itself in a disadvantageous situation. Credit card loan defaults hit a ten-year high and car loans defaults hit a near 30-year high in the third quarter of 2023. For these individuals, the inflation rate has outpaced their wage growth, leaving them to spend more while making less. This group, often reliant on a fixed income, struggles to cope with the increased cost of living. The rise in food and energy prices essential expenses that cannot be easily reduced or eliminated – hits them hardest. Consequently, their financial stability is significantly undermined, leading to increased economic vulnerability and reduced quality of life.

On the other hand, the segment of the population possessing substantial assets has navigated this inflationary period more comfortably. The reason is twofold. First, their assets, such as real estate and stocks, have often appreciated in value, offsetting the rising cost of living. Second, their typically higher income levels provide a buffer against the increased expenses. Therefore, while they too face higher costs for essentials like food and energy, the overall impact on their financial well-being is less severe.

This disconnect in the impact of inflation contains ripple effects on market dynamics. Businesses that cater to basic needs, particularly those offering the lowest prices, are likely to see sustained demand. This includes providers of essential services like low-cost cell phone plans and retailers offering affordable clothing. Their appeal lies in their ability to meet the essential needs of the larger, financially strained segment of the population without having to “break the bank”.

Conversely, luxury goods and services providers, catering to the high-end market, are also likely to thrive. This sector benefits from the inflated value of assets held by the wealthier segment. High-end brands and services often become more appealing as symbols of status and quality, which can ensure their continued success even in an inflationary environment. One great example of this is that according to Bloomberg’s market data analysis, economy car brands are expecting revenue decline of roughly 5% to 7%. On the other hand, luxury car brands are expecting revenue growth of about 20%.

Cellini Spread

From an investment perspective, these market dynamics suggest a strategic shift. Businesses traditionally focused on middle-class consumers might face challenges as their core customer base grapples with reduced disposable income. Investors might consider focusing on either end of the market spectrum the value-oriented providers catering to basic needs or the luxury segment serving the asset rich population.

In conclusion, the recent inflationary period has not only increased the cost of living but also accentuated the economic divide. While those with substantial assets have seen their wealth grow, a significant portion of the population struggles with diminishing purchasing power. This economic bifurcation has profound implications for consumer behavior and investment strategies, favoring businesses at either end of the economic spectrum while challenging those targeting the middle class. Understanding these trends is crucial for navigating the complex landscape shaped by ongoing inflation.

 

Moldaver Lee Wealth Partners, Rockefeller Capital Management

45 Rockefeller Plaza Floor 5, New York / 212.549.5199 rcm.rockco.com/moldaver-lee-wealth-partners