Face up or fess up to the R-word?

Partha Chakraborty-

Partha Chakraborty

Partha Chakraborty is an Indian-born immigrant; a naturalized US Citizen since 2018. Educated in India and at Cornell University, Partha is currently an entrepreneur in water technologies, Blockchain, and wealth management in the US and in India. The views expressed are his own.


In April 2020, I stood for two hours in line to enter my local grocery only to find none of the items I was looking for, bringing back memories of accompanying my parents to a neighborhood Ration Shop in Kolkata only to be met with empty shelves. A year and a half into the pandemic we are facing a repeat of a stark reality in retail – shortage of everyday items. To counter, stores have resorted to a few oldest strategies in the book – euphemistically called “facing up” – in which hard-to-get items are piled upfront so the customer cannot see the empty space behind, and increasing the number of spots, “facings”, certain products are given in place of harder-to-obtain other items. Some others have gone to the opposite end, displaying empty boxes in the hope that people will return looking for the same, especially foreign delicacies. In either case, they’d rather try these stop-gap measures before they have to raise prices. For how long?


There’s a lot of real estate in the press currently being taken up by stories of inflation, and rightly so. Inflation has not been, and almost never is, transitory when faced with a structural issue as we are facing this year. From milk to gas to bacon, consumers are feeling it every day; this morning I paid more than USD 4.5 per gallon of gas, highest ever in my memory. By many metrics the pace is accelerating – core CPI (ex. food and energy) rose 4.6% in the last twelve months, broader CPI rose 6.2% for all urban consumers, the highest in over 30 years. Investors are already bracing for a possible rise of headline number to over 7%; almost nobody is now talking it to back down before third quarter of 2022. Worker incomes are not keeping up even if over 10 million jobs are unfilled, wages adjusted for inflation fell 1.2% over the one-year period. According to YouGov, “56% of adults say they are having trouble affording petrol, 48% cannot easily pay their rent or mortgages and 45% are struggling to put food on the table”. YouGov polling also shows that 46% of Americans feel the economy is getting worse, up from 30% six months back, while only 19% feel the economy is getting better.  Even if no other structural issues crop up, “Consumer Pain Index” will be hurting us well into 2023.


I will claim that inflation is under-reported, even at today’s elevated level. Let’s take a stylized example of my experience with a gym. Early into the pandemic, they stopped charging the monthly fee as they received pandemic payouts, but resumed by March of this year, with our consent. Six months hence, they are open only for half the time compared to pre-pandemic days. New sign-up requirements make it impossible to have a last-minute run for a swim. We can use complimentary access to an affiliated gym about twelve miles away which has an easier sign-up because the pool is open-air, but a curtailed schedule makes it nearly impossible to make the twenty-five miles roundtrip more than once a week. Even if they wanted to keep these facilities open for longer hours, they cannot as there is a shortage of people willing to work. Willing candidates are turned away because it makes no sense to open doors with less than a threshold of attendants. As far as I can see, the gym is caught in a tricky situation it cannot get out of.


Since we are forced to use their facilities no more than a third of the intended, even at the same pre-pandemic fees we face an inflation of 200% in 18 months. That is implicit inflation unreported, or at best undercounted, by the Feds.


Let’s consider consequences. We cannot ask for a stepped-down version of the membership since one does not exist. The gym would not lower the price as it has no idea how long this suspended state of affairs would last. We can try and use the distant facility, but that is a non-solution because of the costs it would incur indirectly. We can suspend/pause membership, but that option is no longer available. Effectively it comes to a binary choice – either continue by absorbing higher costs or cancel membership completely. Given that no other place nearby offers a lap pool, and because we have been a patron for a really long time, we are deciding to continue. Choice is being imposed on millions elsewhere. At the margin people are choosing to change their choice of meat for the upcoming Thanksgiving, forego a trip home for Christmas or a gift for near and dear ones, parents are staying home as child-care is simply not available. In almost every vertical I can find examples that make reported inflation numbers too rosy for our own good.


The fact that we are absorbing higher cost it does not make ours an economic decision. Nor does it lessen inflation’s impact in a broader economic context.


My experience at the gym is indicative of another large-scale change that is pervasive these days. In each of July, August and September, over 4 million workers, or 3% of the workforce, voluntarily left jobs, each month. The numbers are not additive, but the combined figure still points to what is being called The Great Resignation, reflected in over 10 million jobs unfilled. The most likely outcome is a sharp wage inflation, which sounds all good until you realize what happens next. Most of the jobs are in industries, or establishments, that can ill afford a sharp rise in labor cost without upping their own prices – inflation becomes real and reported.


Unless resolved, very unlikely in a near-term, Great Resignation will compound inflation pressures on top of supply chain issues. At which point we will likely see inflation hitting 10%, a level not seen since October 1981, when Fed Funds rate was over 10% consistently, at a point going over 19%. In many ways there is a substantial parallel between current experience and the experience leading to 1980 recession. In 1979 inflation hit 11%. Paul Volcker killed beat inflation down to 5% by October 1982, with a very tight monetary policy, but only at a very high cost to the economy – two recessions, one in 1980 and one in 1981-82. Unemployment was 7.5% in 1980 and rose to almost 11% in 1982, the highest in post-WWII era. Manufacturing, construction and auto were the worst affected, accounting for over 90% of all job losses. Residential construction nosedived; housing starts clocked lowest ever, outside of bursting of the housing bubble during 2008-9 and S&P 500 tanked by over 9.7% in 1981. The list goes on. From every way I look at, I see unforgiving parallels and it means only one thing – we will have a recession in 2022 unless something self-corrects radically.


Time to stop facing up groceries, and start fessing up to the possibility of a Recession in 2022. I anticipate one but I am not looking forward to it by any means.