Cars, Electricity and the Other Areas Hit Hardest by Inflation in 2021
The economic story of 2021 — and one of the greatest anxieties about 2022 — is rising prices. All year long, people watched as their dollars bought less and less of the same services and products that they had been able to afford more easily just a few months earlier.
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But inflation shrank the dollar’s buying power much more in some parts of the economy than in others.
Using data from the consumer price index, GOBankingRates identified the segments of the economy that inflation hit the hardest and then talked to economists and other experts to see what it all means.
Inflation’s Impact Has Been Lopsided All Year
The rising prices that defined 2021 were not distributed equally. The worst damage has been highly concentrated in just a few areas of the economy.
“Right now, roughly 60% of what is driving inflation higher is clustered in about 30% of the Consumer Price Index,” said Joe Brusuelas, chief economist with RSM US. “It is primarily located in energy, industrial supplies, and travel.”
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The statistics back up that assertion. The following categories all have a place among the 10 hardest-hit segments of the economy.
Fuel oil: 59.3% year-over-year (November 2020-November 2021); and 3.5% month-over month (October-November 2021)
Motor fuel: 58%; 6.1%
Used cars and trucks: 31.4%; 2.5%
Utility (piped) gas service: 25.1; 0.6%
New vehicles: 11.1%; 1.1%
Electricity: 6.5%; 0.3%
Brusuelas expects that inflation’s impact on these “volatile components” will ease noticeably in 2022.
“That is already evident in falling oil prices and the modest dip in gasoline prices,” Brusuelas said. “Beyond the oil and gasoline components, what we are really talking about is the disruptions around supply chains. While some of that has eased, it will be the second half of next year before we experience real relief on that front.”
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Vices Also Got More Expensive
The vices that people tend to lean on when the going gets tough put an even greater burden on family budgets in 2021. Smoking and drinking found their own spots in the top 20 — the former made the top 10:
Tobacco and smoking products: 8.9%; 0.9%
Alcoholic beverages: 1.9%; 0%
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Food and Shelter Are Where the Pain Was Most Intense
Inflation’s impact was most dramatic in the categories involving energy, fuel and vehicles, but food and shelter were hit hard, too — and they have at least as big an impact on the day-to-day lives of regular people as gas and oil.
“Food and shelter represent a large portion of a typical household’s expenditure,” said Amit Sinha, head of multi-asset design at Voya Investment Management. “This means that groceries, eating out, and renting or buying a home are more expensive for the common person than what they have been used to in the past. Individuals have gotten used to moderate — typically less than 2% — increases in food and shelter. Therefore, 4%-6% increases represent a departure from recent history.”
That 4%-6% Sinha cites is just the average. Here’s the specific breakdown:
Meats, poultry, fish, and eggs: 12.8%; 0.9%
Other food at home: 5.7%; 1%
Nonalcoholic beverages and beverage materials: 5.3%; 0.2%
Cereals and bakery products: 4.6%; 0.8%
Fruits and vegetables: 4%; 1%
Shelter: 3.8%; 0.5%
Dairy and related products: 1.6%; 0.2%
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It’s Hardest on Those Who Can Afford It Least
Throughout 2021, prices rose faster and higher on items that disproportionately impact the less affluent.
“Since shelter and food represent a bigger percent of expenditures for low-income consumers, the jump in inflation is worrisome for this segment of the economy,” said Gene Goldman, CIO at Cetera Investment Management. “This is very concerning, especially when you factor in that wages, particularly for low-income workers, while higher, have not risen by the same percentage as inflation. As such, the economic ramifications are concerning. Consumers may begin to reduce spending, which is the backbone of the American economy — about two-thirds of GDP.”
Goldman believes we’re already seeing evidence of this.
“The November Retail Sales report rose just 0.3%, below the 0.80% expected, and far below October’s 1.8% increase,” Goldman said. “Not a good start to the holiday season as consumers are facing rising inflation.”
If this inflation disparity is potentially harmful to the consumer economy, it’s certainly harmful to the people who were struggling to begin with.
“Rising prices are mainly hurting people who can least afford it,” said Mike Piershale, ChFC, and president of Piershale Financial Group. “For example, for everyday Americans, food inflation is now running very close to 30%-40% of their expenses. Many of our clients are driving less to save on gas, eating more inexpensive cuts of meat, and even lowering their thermostats to reduce their gas bills. Some are also putting off the purchase of automobiles since even used cars are up 32% over the last year and putting off home improvements with the skyrocketing cost of lumber.”
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The Necessity vs. Price Sensitivity Dynamic
Steve Bain is an independent economist and blogger with Dying Economy who spent seven years working in economic development and regeneration. For him, the real story is the connection between an item’s price and the ability of consumers to put off purchasing it.
“The sectors of the economy that were most affected by inflation were those for which their products are most price-sensitive, i.e. luxury goods and products for which there is no immediate need,” Bain said. “Home improvements like decorating, extensions, conservatories, and so on all face extra loss of business because people can easily delay purchasing these things.”
Oddly, according to Bain, the industries least affected are those for which prices are rising most dramatically.
“That might seem counter-intuitive,” Bain said. “But those prices are rising fastest because consumers cannot delay their purchases. Food and energy are the two obvious examples. Their prices have risen the most precisely because consumption of these products will not fall, regardless of price increases.”
Some products, he points out, can benefit from inflation if higher prices elsewhere make them an attractive second choice.
“In this case, we’re talking about ‘substitute goods,’ i.e. cheaper alternatives to goods that people usually purchase,” Bain said. “For example, purchases of cheaper cuts of meat will probably increase as people turn away from more expensive cuts. Similarly, manufacturers of other cheap foods will probably see increased sales going forward. Cereal manufacturers are well placed to benefit from food price inflation.”
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Methodology: For this piece, GOBankingRates sourced the Bureau of Labor Statistics’ November 2021 Consumer Price Index to find the most recently released data on the cost of select categories measured and tracked by the Index. GOBankingRates then compared the cost changes, by percentage, month-over-month from October 2021 to November 2021 and year-over-year from November 2020 to November 2021. All data were collected on and up to date as of Dec. 13, 2021.
This article originally appeared on GOBankingRates.com: Cars, Electricity and the Other Areas Hit Hardest by Inflation in 2021
