What’s the real cost of inflation for the Sonoma County economy?

The record 8.5% annualized inflation rate — the highest in 40 years — is a real figure when it comes to the cost of food, fuel and housing says a Sonoma County-based economic development official.

“This means it costs roughly $460 more per month today for the average U.S. household to pay for the same items they purchased a year ago,” said Ethan Brown, interim executive director of the Sonoma County Economic Development Board (EDB), at a July 6 meeting of the Sonoma County Alliance which looked at inflation, and the outlook for the economy going forward.

Brown told the business advocacy group that inflation is fueled primarily by two drivers: The Russian invasion of Ukraine, which according to Moody’s Analytics accounts for 3.5 percentage points of the 8.5%, and the pandemic, which — even in this stage — is still responsible for roughly 2 of these percentage points.

“In the wake of the war in Ukraine, trade policies have helped contribute to the shortfall in oil supply, which not only affects prices at the pump, but indirectly results in higher food and commodity prices,” Brown added. “Some economists initially forecast that this would have a relatively small economic impact and be offset by a strong domestic energy sector. Unfortunately, the spike in prices was conflated with already-high pandemic-related inflation.”

Inflation is causing the Federal Reserve to use interest rate hikes to cool down the economy. In June, the agency raised short-term interest rate by 0.75 percentage points. How much and how fast the Fed acts in the future is key — too much and the country could be thrown into a recession.

Moody’s says inflation will continue to rise during the summer with a projected peak of 9%, declining to 8% by year end, and reaching 3%–4% next year. At the same time, the Fed is expected to raise rates substantially over the next six months or longer, including a 0.5 to 0.75 percentage point hike at the July meeting; 0.25 to 0.5 point increase at the September meeting and successive 0.25 point hikes at the next four meetings. This results in a 2 point increase on the high end.

While the threat of a recession may loom, Moody’s philosophy is that unless there is a two-thirds (66%) probability of it happening in the next 12 months, the firm will not include it in their baseline forecast. At this point, Moody’s is still seeing that probability at only around 25%. While GDP numbers are down for the second straight quarter, their economists also look at factors such as personal income and the labor market –which are still showing signs of strength.

Brown said Moody’s is making three assumptions regarding inflation:

• Assuming that economic sanctions driving energy and fuel prices have been fully realized at this time, considering that global producers have pledged to ramp up output, the U.S. should be seeing the worst of the pricing spikes now, barring any new developments in Ukraine that could put upward pressure on energy, agriculture and metals pricing. Gas pump price reductions have already started to appear.
• The pandemic will be an influence for some time to come, but should weaken in successive waves if it follows the usual pattern.
• While the Fed has to make all the right moves, consumer pessimism and anxiety is out of phase with some leading indicators of recession, which are still showing strength. For example, the Atlanta Fed is seeing a dramatic de-coupling of normally correlated measures such as consumer confidence (which is low) and the strength of the labor market (which is good). Wage growth is still strong, while income expectations are low.

“None of this is to suggest that financial pain is not being felt and seen now,” Brown said.

Also at the event, several experts analyzed how the economy is affecting their industries.

• Ross Liscum, Century 21 Epic: Housing prices flatten but don’t decline
• Scott Kincaid, Facility Development Company: Construction industry faces fuel, supply challenges
• Jennifer Beretta, Beretta Family Dairy: Farmers often must absorb price increases
• Kris Wilson, Historic Railroad Square Association: Cost of gas shows up in restaurant, retail business costs
• Henri Komrij, Keysight Technologies: Manufacturers adapt, switching supply chains if needed
• Claudia Vecchio, Sonoma County Tourism Bureau: Tourism is recovering, but regaining lost ground still a challenge
• Mike Martini, Taft Street Winery: Wine in bad times and good remains a solid play
• Troy Sanderson, Exchange Bank: How lenders keep their footing in a fast-changing world

See their insights on the local economy here.