Business Update with Mark Lacter

Inflation and oil prices

KPCC's business analyst Mark Lacter talks about how inflation and rising oil prices are affecting the economy.

Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, if inflation is supposed to be so low, why are gas prices getting higher every day?

Mark Lacter: Well, inflation isn't so low if you're just talking about energy prices. Remember that the price of gas in L.A. was up about 12 percent last year - and it would have been even higher without a big drop that came in the fall (of course prices are back up – about 8 cents a gallon in just the past week). Inflation is also not low if you're looking at food, which is up about 5 percent. Apparel is up 6 percent, health care 4 percent - certainly sizable increases. But when you put together all the categories, inflation is just not that big a deal. The Consumer Price Index in Southern California was up around 3 percent, which is roughly where it's been for the last couple of years. The basic explanation is that, putting aside gasoline and food, prices are still trending down.

Julian: Like housing.

Lacter: Housing is the most obvious example - the median price in L.A. County is down about 6 percent from a year ago. But it's more than housing - the American consumer has become fixated at getting the lowest possible price. You see it at Wal-Mart and Costco, you see it with companies like Groupon, you see it with the Internet sites that give you price comparisons. Now it's true that retailers had a decent holiday sales season, but they had to mark down merchandise so sharply during the last few days before Christmas that their profit margins took a significant hit. We'll find out more in a few weeks when the chain stores report fourth-quarter earnings.

Julian: Is this another case of consumers holding out for the cheapest possible price?

Lacter: Yeah, and you see it in a lot of ways. One example that USA Today put together is the price of a 14-cubic-foot refrigerator. In 1970, it cost $288, which adjusted for current inflation is about sixteen hundred dollars - except that same sized refrigerator can be bought these days for less than $500. Actually, some economists keep insisting that our problem is not inflation, but deflation, which is when prices go down. The problem is that we tend to dismiss prices that go down and focus our concern on prices that go up – gasoline, for example, which could easily top $4 a gallon in California and stay there for much of the year.

Julian: And if that were to get out of hand…

Lacter: There might be more pricing pressure for other items. But so far, there's not much sign of that happening, which means inflation isn't the problem that it appears to be.

Julian: Are higher gas prices keeping people from moving to California?

Lacter: Not so far. Matter of fact, Allied Van Lines says that it handled around 300 more inbound moves to California last year than outbound moves. That's not a huge net gain, and it’s well below the results for Texas, which was again the nation's top destination - mainly because its economy has held up better than other states. But keep in mind that for years California has been considered a state where more people left than moved to. So being an inbound state is an encouraging development.

Julian: Just curious, what other states lost the most residents?

Lacter: Illinois had the most number of net departures, followed by Pennsylvania and Michigan. Now the optimists would say that these numbers point to more job opportunities opening up in California and therefore an improving economy. The pessimists would say that fewer people are leaving because they can't afford to leave - that their homes are worth less money than what they currently owe on their mortgages. I suspect there’s some truth to both those claims, but the optimists probably have an edge because there's a better chance that the state and local economy will get better rather than get worse. It's already gotten better – since unemployment hit bottom about a year ago, more than 300,000 jobs have been added to the state rolls.

Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.


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