The Federal Reserve is raising rates to cool down inflation and the Fenton Winery & Brewery is roasting turkeys.
Ginny Sherrow, who owns the taproom and expansive wedding venue with her husband, Matt, said the price of deli meat went through the roof. It ultimately made more sense economically to stop buying deli turkey and start roasting the whole bird for the turkey and fontina sandwich on the menu.
It’s all about being as creative as you can to deal with the higher cost of ingredients, she said, and keeping prices in line as much as possible.
“We can’t absorb it all or we won’t be sustainable,” said Sherrow, who notes that wages at the craft winery and brewery went up almost 20% in the last year.
She knows that there are limits to how much of the brewery’s higher costs can be passed along to consumers who are already feeling the pinch.
“With this inflation,” she said, “you just can’t go out to eat as much as you used to be able to do with the prices of meals.”
And many consumers will feel an even greater financial squeeze as interest rates climb in the months ahead. Sticker shock will keep hitting car loans, credit cards, mortgages and more.
As expected, the Federal Reserve officially announced Wednesday that it is driving up short term interest rates by a half of a percentage point.
The rate hike — the second in 2022 — puts the federal funds rate to now in a range between 0.5% to 0.75%.
The Fed, according to its statement Wednesday, remains “highly attentive to inflation risks,” which include uncertainties for the U.S. economy after the invasion of Ukraine by Russia and the risk of more supply chain disruptions after COVID-19-related lockdowns in China.
Federal Reserve Chair Jerome Powell said Wednesday in his press briefing that the Fed understands that inflation represents a significant hardship for those who have difficulty paying more for food, housing and transportation.
Powell said additional, similar rate hikes of 50 basis points will be on the table at the next couple of Fed policy meetings.
“The labor market is extremely tight and inflation is much too high,” said Powell, who suggested more rate hikes are ahead.
We’re still talking about exceptionally low rates at a time of skyrocketing inflation, which is at the highest level in 40 years. And the Fed will need to do more, much more, to try to get inflation under control.
The Fed is walking a fine line between having to cool down demand but not push the U.S. economy into a deep freeze.
Can’t seem to get ahead
Right now, many consumers fear their financial lives are falling backward as they’re paying substantially higher prices for food, gas, utilities, clothing, rent, and new and used cars.
Inflation, something which hasn’t been a trendy topic for years, is top of mind. Many lower income and moderate income families face real financial hardships when their grocery bills climb dramatically, they can’t find a car they can afford and their rent is skyrocketing.
The consumer price index shot up 8.5% for the 12 months ending March, the largest 12-month increase since December 1981.
“The Fed now knows they can no longer avoid taking inflation seriously,” said Patrick Anderson, CEO of the Anderson Economic Group consulting firm in East Lansing.
“They’ve abandoned their euphemism of ‘transitory’ (inflation),” he said. “They now have to talk about inflation all the time.”
Sticker shock isn’t about to vanish
Price hikes started hitting in the spring of 2021, roughly a year into the pandemic. The Fed initially blamed “transitory” factors after the COVID-19 economic shock contributed to driving up prices for food, cars and other goods.
The theory was that prices could pull back once glitches and quirks worked their way out of the economic system.
As more workers returned to their jobs, for example, employers wouldn’t in theory have to keep raising wages.
As kinks in the supply chain improved, inventories in theory would rebuild and price hikes in the auto industry and elsewhere wouldn’t keep building.
It didn’t work out that way.
Charles Evans, president and chief executive officer, Federal Reserve Bank of Chicago, told the Detroit Economic Club on April 11 that inflationary pressures didn’t end up being transitory as initially projected in part because supply chain disruptions, such as the microchip shortage, proved to be deeper and lasted much longer than anticipated.
Evans said then that a 50-basis point hike in May — following a quarter-point hike in March — was perhaps highly likely and more rate hikes would be ahead to get the federal funds rate to the 2.25% to 2.5% range.
“Inflation pressures clearly have widened in the broader economy to a degree that requires a substantial repositioning of monetary policy,” Evans said in another speech in February.
Why didn’t Fed see this one coming?
Many maintain that the Fed missed big flashing warning signs that the spikes in prices weren’t temporary.
Small business owners saw very obvious signs a year ago that inflation was real and liklely to remain troublesome for some time, according to Brian Calley, president of the Small Business Association of Michigan.
But the Fed and others didn’t appear to be listening to stories about the pain from shortages of goods and significant price increases.
“They probably could have gotten away with a slower or moderate increase in interest rates if they started a year ago,” Calley said.
More aggressive rate hikes, though, remain in the cards in 2022, which could put the employment picture and the economy at more risk.
Inflationary pressures and supply chain disruptions, which contributed to higher prices, hit small business owners hard because, unlike major manufacturers or big name retailers, they aren’t large enough to get priority status or have the ability to negotiate lower prices from their suppliers.
“Smaller businesses don’t have a lot of pricing power both as a seller or or a buyer. Larger companies have at least some control over their pricing because of the volume they generate,” Calley said.
In a recent survey, 61% of small business owners in Michigan identified inflation as the one of the biggest problems facing their business. Most — some 87% — reported that costs are increasing more than usual.
The survey conducted in late April involved 500 Michigan small businesses. Other major issues: supply chain disruptions and workforce shortages.
Calley noted that small business owners who need to borrow more heavily to start a business, manufacture parts or stock their shelves face greater pressure as rates go up.
Higher borrowing rates can pile onto the stress of seeing payroll costs go up, dealing with price hikes and overcoming supply chain disruptions.
Overall, though, Calley said many small business owners remain confident that things will work out.
Chicken wings listed at ‘market price’
Sherrow, who lives in Holly Township, used to be a financial adviser. She opened the Fenton Winery & Brewery with her husband in January 2008 before the financial crisis really hit hard. They were passionate about wine and craft beer and wanted to own their own business.
The latest economic challenges aren’t as threatening, she says, as the financial meltdown more than a decade ago. People have saved money. They’re still working at big employers nearby like Magna Electronics, an auto supplier. And they’re holding weddings again.
Her small business made it through some very rough times during the pandemic when its wedding venue, which can accommodate up to 280 people, was shut down from March 2020 to June 2020 and again from November 2021 through April 2021.
“It was tortuous,” she said.
This year, 86 weddings are booked so far and it’s likely that number could go up to 95.
“I’m optimistic,” she said. “I have to be as a small business owner.”
While she hopes inflation has hit a peak this spring, she’s still seeing many prices go significantly up and stay up right now.
Small business owners are looking at a variety of ways to address higher costs — staying open hours only when they know there will be steady customers to cover the cost of staffing. Or no longer stocking items that have gone up significantly in price and aren’t always big sellers.
Sherrow’s seen some restaurants even put “market price” on their menu for items like bacon or chicken wings to reflect the current going rate for those items.
It used to be that “market price” was a pricing technique reserved for specialty items, like lobster, that fluctuated in price based on the season and availability.
She’s also realistic and does not expect the flurry of customers that she saw last summer when everyone had money to spend and wanted to get out.
“We need to prepare ourselves for a slowdown,” Sherrow said.
Will people pull back spending?
What’s in our favor: The jobs picture is strong, many people have their debt under control and some did build up a good deal of savings during the pandemic after stimulus cash flowed into their bank accounts.
Consumers have kept spending but U.S. economic growth has slowed down. During the first three months of 2022, the gross domestic product fell at 1.4% pace in the first quarter. Forecasters had expected a gain of 1%.
Even if this slight drop doesn’t signal a recession ahead, and some say it doesn’t, the reality is that robust growth is over for now.
Higher prices even take the air out of some of life’s smaller purchases and pleasures.
“I’ve had some close calls,” said Steve Schniers, whose side hustle is inherently inflationary. His business card reads “Magic Steve. Your balloon guy on standby.”
Schniers, who makes one spunky balloon dog and other balloon animals filled with personality, raised his prices as the cost of balloons went up.
Balloons went up 20% or more, he said, and many times some colors and sizes of balloons are extremely hard to get.
“I was lucky these were in stock the past weekend and I snatched up all I could,” he said, referring to a long blue balloon that has a metallic look with a shiny hue.
Disruptions in the supply chain make things, like latex balloons, difficult to get. Some warn of shortages of helium and some businesses are even rationing helium-filled balloons for pre-booked parties.
Animal balloons don’t use helium so Schniers isn’t worried about that much.
No one has backed out of booking Schniers for a party or event after being quoted the new price, he said, but some have commented that he didn’t charge that much in the past.
He’s now charging $100 an hour — and $75 an hour after that.
He previously charged $60 an hour.
His job is in marketing but has been going to events all over Michigan making balloon animals for 20 years. He made balloons for shoppers as part of the festivities during Independent Bookstore Day on April 30 at Fenton’s Open Book store.
Schniers, 38, says inflation is everywhere from the gas station to the grocery store to Amazon where he buys some balloons.
He knows his credit card debt will be going up too, as interest rates are expected to climb. He lives with his brother in Grand Blanc and pays him rent so he’s not expecting a rate hike there.
“Higher interest rates are going to impact everyone,” he said. “You don’t like it but you can’t exactly control it.”
Higher borrowing costs give consumers a reason to think twice about taking on a new car payment or buying a home.
“Consumers are used to having extremely low borrowing rates for new car loans and even for used car loans. That has been baked into buying new cars now for at least 10 years,” Anderson said.
“That was possible while inflation was close to zero,” he said. “And while the auto companies were in many cases implicitly subsidizing the finance rates.”
Going forward, Anderson said, both of those favorable conditions for consumers are going away.
Automakers have less need to offer cut-rate finance deals when they’re selling every car they can produce, inventories are low and people are paying above sticker price to get the car or truck they want.
“Inflation is now rampaging at 8% or more and can no longer be hidden from consumers or workers,” Anderson said.
Anderson said we could be looking at least another year of rising mortgage rates and car loan rates.
“I don’t think at this point you can put that genie back in the bottle without any pain. One of the pains we’re going to see is higher interest rates.”
He blames some of the problem on the Fed itself, as well as aggressive fiscal stimulus policies.
“I and many other economists have been admonishing, chiding, criticizing and reminding the Fed that inflation is growing and they’re not doing anything to stop it for almost two straight years now,” Anderson said.
“Their recent and very tardy awareness of the inflation problem is something that they should be apologizing to the American people for,” he said.
How much higher will rates go?
The Fed will be trying to cool down demand — and in turn limit price hikes — by raising short term interest rates.
Another half point rate hike is expected at the Fed’s next meeting June 14 and June 15, according to Mark Zandi, chief economist for Moody’s Analytics.
Zandi says the Fed is now on “high alert.”
It’s likely, he said, that the Fed will raise short term rates by a quarter point for the next four meetings after that in July, September, November and December.
More rate hikes would be ahead in 2023, Zandi said, until the Fed reaches a federal funds rate of around 3% by late next year.
Zandi noted in a recent report: “Fed officials aren’t explicitly telling investors its plans, but it has all but done so through various communications — speeches, media interviews, FOMC meeting statements and minutes.”
Mortgage rates have seen dramatic hikes in just the past year.
The average 30-year rate mortgage was 3.55% in May 2021 but had shot up to 5.22% by April 27, according to data from Bankrate.com.
Economist Zandi is forecasting that mortgage rates could peak at 6% late next year. Mortgage rates are going up based on trading in the 10-year Treasury bond market.
In general, investors see the risk of a recession going up —- thanks to Russia’s war in the Ukraine, rising inflation and fears that the Fed might hit the brakes too hard and not engineer a soft landing for the U.S. economy.
So far, some hikes for consumer loans have been relatively small. But analysts expect that rates for car loans and credit cards will go up in the future, as the Fed drives short term rates ahead.
The average five-year new car loan went up slightly to 4.47% from 4.37% a year ago, according to Bankrate.com. Higher car loan rates only matter to you if you’re buying a car. Your rate on your car loan doesn’t jump as rates go higher.
Any consumer who carries a balance on a credit card will pay more in interest as the Fed pushes up rates. Most credit card rates would go up within a billing cycle or two.
The average credit card rate went up only slightly to 16.4% from 16.22% a year ago.
The U.S economy is close to full employment. To find more workers, companies are having to drive up wages in many industries.
“Unless growth slows, the already painfully high inflation will accelerate higher and be more persistent,” Zandi said.
The Fed has its work cut out for it when it comes to slowing economic growth to crack down on inflation.
And the pain that many borrowers will feel ahead has only just begun.