About a block from Traverse City’s glistening west bay along Lake Michigan is the Red Ginger restaurant — a favorite for locals and tourists looking for upscale cocktails and Asian-fusion fare.
But like every restaurant and just about every brick-and-mortar business, supply chain problems and finding enough people willing to work during the busy tourist season in Northern Michigan has been a real challenge during the pandemic. Inflation has only thrown that difficulty into sharper relief, says co-owner Pam Marsh.
After losing several key staff members earlier in the spring, Marsh and her husband raised pay for back-of-the-house employees like line cooks to anywhere from $19.50 to $24 an hour to retain the staff they have. Meanwhile, employees struggle to find places to rent because in a tourism hotspot like Traverse City, much of the real estate has been eaten up by short-term rentals. At the same time, suppliers to the restaurant keep raising prices and still-high energy costs don’t help either.
For the first time, Red Ginger received its first negative review online — a fact that Marsh described as “super demoralizing … because we pride ourselves on great reviews and service.”
The gist of the complaint? The food was more expensive, but it hasn’t necessarily gotten better. The cost of Scottish salmon that Red Ginger had been buying from its supplier, for example, shot up to almost $40 per pound. And the salmon was “OK,” Marsh says, but not phenomenal.
If you want a negative review of inflation as a whole, substitute Red Ginger for just about anything right now: eggs, cameras, cars, rent, bread, gas — the list goes on. Everything is more expensive, but you’re not getting a better product just because you’re paying a lot more.
That’s inflation in a nutshell. Your money is worth less than it was. And it’s the biggest challenge the economy is facing right now. In May, President Joe Biden announced that inflation is his “top domestic priority.”
For many Americans, it’s another significant hardship after years of enduring the pandemic.
As of June 2022, the average price of chicken is $1.82/lb compared to $1.47 in June 2021. The average loaf of white bread costs $1.69 this summer compared to $1.46 last summer and $1.20 in 2019. Meanwhile, rent has steadily climbed since 2019.
If you live in a city like Chicago or Detroit, the average price of gas has hovered above $5 per gallon for a couple of months (in the Detroit area, it dropped below $4.50 per gallon in mid-July) after Russia’s incursion into Ukraine caused fuel prices to skyrocket. Since the average person spends about 30 minutes commuting to work, that gets expensive fast.
Higher prices are cause for grumbling. But for people without much room to adjust their budget, it can mean painful or impossible decisions about what to go without.
The Federal Reserve has an antidote to that: raising interest rates. But it’s a broad brush, and it creates problems of its own.
For Marsh, after hanging onto her restaurant through lost sales and the pandemic’s many ups and downs, supply chain problems and higher costs, the prospect of her customers having less to spend — and fewer people being willing to spend it — its scary to say the least.
“I don’t know how much more, as a business owner, we can get thrown at us,” Marsh said. “It is what it is, but you pass it on to the customer.”
Marsh said she thinks Traverse City could be in a unique position to weather the coming economic storm, thanks to the area’s affluence. But other local markets might not fare so well.
Causes of inflation
While Republicans blame Democrats and Democrats point to ongoing and persistent supply chain problems and corporate greed, the biggest single factor behind inflation is the pandemic, according to economists.
Supply chains were roiled by years of shutdowns, trade bottlenecks, materials and labor shortages. Many of these issues still are ongoing, said supply chain expert Robert Handfield, a professor at North Carolina State University.
Ports and freight shipping still are facing bottlenecks and shortages are persistent across many industries. In late July, General Motors profit fell 40 percent as inflation and the dearth of chips helped feed into a $2.8 billion profit decline from the same quarter last year, the New York Times reported.
Many plants still don’t have enough workers to reach their output capacity and it’s still difficult to find steel. Meanwhile, China’s zero-COVID-19 policy is fanning renewed anxiety over economic hardship after new outbreaks spurred lockdowns and mass quarantines, the Times reported.
But the most fundamental shift is that the pandemic created a sea change: COVID-19 reversed the spending trend. Whereas pre-pandemic the majority of discretionary spending had previously been for services, most spending is now on tangible goods. So demand for things rose, but supply lagged far behind. Prices naturally shot up.
Flooding the market with free and cheap credit didn’t help, either.
Since early 2020, the Federal Reserve poured $4.5 trillion into the economy by purchasing Treasury Bonds. That helped ease the acute economic pain at the time, but it may have only prolonged the inevitable by feeding inflation.
Add to that the billions in stimulus money to individuals, local and state governments and businesses both small and large, and the economy saw a fairly strong recovery from the early days of 2020.
The trillions poured into stimulus packages over two years also stoked inflation. Then war broke out in Ukraine, gas and energy prices soared and everything else got even more expensive.
“The indicators are pretty clear that inflation is going to continue for some time and likewise the different indicators of shortages are also occurring,” Handfield said. “However, we are not anywhere near a recession. We’re in a situation we’ve never really encountered before, which is why economists are so confused right now.”
For now, the economy is still chugging along and people are still “spending like drunken sailors,” Handfield said.
Air freight is up 25 percent; manufacturing revenue is the highest it’s been since 2004; many companies have lots of cash reserves; industrial output is up and manufacturing employment has clawed its way back to pre-pandemic 2019 levels.
“I don’t think the Fed actually needs to induce a recession to get inflation under control, because a lot of these forces are supply side,” said Jason Miller, a supply chain management professor at Michigan State University’s Broad College of Business.
But strong headwinds are already here. All the financial markers of a recession show investors are preparing for that possibility, and a growing chorus of economists are adding to the warning calls.
In late July, the International Monetary Fund (IMF) said in a news release the economic outlook “has darkened significantly since April” and warned that “the world may soon be teetering on the edge of a global recession, only two years after the last one.”
The global economy is “still reeling from the pandemic,” wrote Pierre-Olivier Gourinchas, economic counselor and director of research for the IMF. Meanwhile, Ukraine faces “an increasingly gloomy and uncertain outlook,” and high U.S. inflation and other European countries have set off “a tightening of global financial conditions” as economic growth slows in the three largest economies — the U.S., China and Europe.
To control inflation in the U.S, the Federal Reserve has one tool: raising interest rates.
This makes it more expensive to take out loans on anything from houses to cars or new business startups and expansions. It also makes paying off existing debt more expensive. This has the effect of contracting the economy — cooling spending, hiring and expansion — and it eventually tames inflation, as businesses begin reducing prices in response to decreased consumer spending. But it does so at a cost.
Just a day before the IMF’s warning, the Federal Reserve announced a second large interest rate increase in the final week of July. The Fed raised rates by 0.25 percent in March, then 0.5 percent in May and then 0.75 percent in June. The Fed added another 0.75 percent hike July 27 — raising rates to 3.4 percent in total by the end of 2022. Federal interest rates are currently about 1.6 percent.
In a June news conference, Fed Chairman Jerome Powell told reporters that the labor market remains “extremely tight” and inflation is still “much too high.” Noting that the economy has endured a lot during the past two and a half years and that inflation is causing hardship for businesses and families alike, Powell said Fed policymakers are “strongly committed to bringing inflation back down and we’re moving expeditiously” to bring prices back down.
Powell said the Fed’s goal remains promoting “maximum employment and stable prices” and stressed that they’re “not trying to induce a recession now. Let’s be clear about that.”
The Fed hopes raising rates will cool the economy with minimal impact on employment. Raising rates inherently makes it tougher to borrow, but it’s largely a psychological game, says Christian Lundblad, a professor of finance and senior associate dean at the University of North Carolina Kenan-Flagler Business School. More than anything, it tames expectations by signaling that the Fed is serious about getting a handle on inflation.
When people believe that inflation is here to stay, they buy things faster, ask for raises to keep up with the rising cost of living and companies in turn charge higher prices to make up for higher costs and because people will pay more for the same goods and services. Expectation creates “a self-fulfilling prophecy,” Lundblad said.
That’s exactly what happened in post-WWII America, where inflation climbed for decades until peaking in the early 1980s, when the Fed, then chaired by Paul Volcker, hiked interest rates high enough to finally end double-digit inflation.
Lundblad said the current economic situation “rhymes” with what happened in the late 1970s and early 1980s. But it’s “not nearly as dire as it was then.”
Still, then as now, raising interest rates has consequences. In 1982, Volckner hiked the federal funds rate to a record 14.6 percent — so high that it created a profound U.S. recession and set off a debt crisis across Latin America, which was paying off substantial dollar-backed debt that skyrocketed in cost.
“I don’t think we’re going to have to feel what we felt then and I don’t think the Fed is going to have to be as aggressive as it was in the late 1970s and early 1980s. But at the same time, it resembles it in a way,” Lundblad said, predicting that monetary policymakers “probably have no choice but to engineer (a recession)” by the end of the year or the beginning of 2023.
A real recession, of course, isn’t only about more expensive debt. It creates more unemployed workers.
Former U.S. Treasury Secretary Larry Summers is keenly aware of this. He argues, matter-of-factly, that the Fed needs to dramatically increase unemployment to bring back price stability.
“We need five years of unemployment above 5% to contain inflation — in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” Summers said in June, Bloomberg News reported. “There are numbers that are remarkably discouraging relative to the Fed Reserve view.”
About 5.9 million people are currently unemployed, or about 3.6 percent of the workforce. Summers is saying the Fed, in effect, needs to almost double the number of unemployed U.S. workers to bring inflation down — a number not so distant from when the COVID-19 pandemic took hold in the spring of 2020 and millions of workers were sent home.
According to the Pew Research Center, an increasing number of Americans now view inflation as the country’s top problem, with 70 percent of people polled saying it’s a huge problem compared to 55 percent and 54 percent saying health care and violent crime, respectively, are the top issues facing the U.S. today.
Meanwhile, the University of Michigan’s most recent consumer sentiment report indicates increasing fears of a looming recession, while other measures in the bond market demonstrate that investors also are increasingly preparing for the same possibility.
But the picture is complicated by the fact that U.S. employers kept up a hot hiring spree in July, adding 372,000 jobs and signaling to policymakers and investors that the economic storm might still be far from touching ground.
At the same time, gas prices also declined in July — a key factor behind across-the-board inflation, while consumer demand remained high.
Still, the market is showing some early signs of contracting. According to a June report from the Peterson Institute for International Economics, “There are signs that the pace of wage growth in the United States may have passed its recent peak.”
Overall growth in private sector wage increases has started to taper.
“The 12-month change in average hourly earnings fell from 5.6 percent in April to 5.3 percent in May, and the 6-month change showed a similar decline,” the report said. “Wages are still growing faster than before the pandemic, but they appear to be decelerating.”
And wages are still not growing fast enough to keep pace with inflation. While that’s better for preserving the value of the dollar, it means that Americans have less money to spend.
Meanwhile, many companies already are appearing “less inclined to raise wages to fill vacant positions,” suggesting they’re “less desperate to fill openings, perhaps because of concerns that demand for their products may soon fall if the Federal Reserve raises interest rates,” the PIIE report said, based on analysis from Harvard Kennedy School’s Karen Dynan and Wilson Powell III.
If a recession is on the horizon — as many fear and many predict — it’ll have huge social consequences, too, said Lauren Melodia, deputy director of fiscal and economic policies at The New School’s Center for New York City Affairs.
According to Melodia, “It’s gonna exacerbate inequality. All the people who have been making gains at the bottom of the income distribution are going to have a harder time making gains.”
So a recession could deepen existing income inequality for women, Black and Latino workers and people in lower income brackets more broadly.
To help ease the pain brought on by the Fed’s attempts to rein in inflation, Melodia and other progressives argue that “targeted support” is needed for people who are likely to be the hardest hit, and that Congress and local governments should pursue other policies alongside the Fed.
For now, small and large business owners alike are watching and waiting.
Steven Dyme, co-founder of a Chicago-based floral business, Flowers for Dreams, said he’s started offering discounts to new markets, including free shipping to Michigan, Ohio, Indiana, Missouri and Minnesota customers.
Dyme said he’s seen a slight dip in everyday orders. But much of his business comes from large events and weddings, which for now haven’t slowed down.
Like many small businesses, Flowers for Dreams still is actively hiring and recruiting for part-time and hourly jobs during the busy summer event season, Dyme said. It’s a far cry from last year, “which was chaos,” Dyme said.
Gary Kosch, who owns a handful of restaurants and bars in Northern Michigan, said his businesses’ staff levels are likewise much better than a year ago.
But everyone is feeling the sting of inflation. Everything on the menu costs more because all the input costs are higher, Kosch said. He’s had to print new menus at least once a month just to keep up with price increases, and it still eats into profits.
For now, Kosch said he’s holding off on expanding his businesses. He owns all his real estate. Still, the “sticker shock” and what could come next are cause for concern.
“We’re starting to see people be a little more cost-conscious than they were maybe six months ago,” he said. “I’m worried about sales, quite frankly. I think we all are.”
Kosch, who’s been in the restaurant business for 40 years, said if he’s learned one thing for sure: “Nothing lasts forever.”