Every inflation in history has sapped consumer purchasing power. This one is no different.
If we added a zero to all items denominated in the devaluing currency and we did so in unison, no one would lose anything. No one would get hurt. No purchasing power would be lost. Bananas would cost $50 rather than $5, but a $50,000 annual salary would become $500,000. We would describe our purchasing power using different numbers, but our purchasing power in terms of the goods and services we could afford would stay exactly the same.
Unfortunately, that is not the way a devaluing currency ripples through the economy. Some items in the economy start reflecting the new lower value of the currency faster than others. The prices of some items move up quickly. The prices of other items move up more slowly. It is that timing difference that devastates the local consumer.
The prices of goods and services traded daily in big liquid global markets tend to reflect the new lower value of a devaluing currency first. Commodities like oil, copper, and wheat are early movers. The products derived from these commodities like gasoline, bread, and copper wire follow in quick succession.
If we think of the purchasing power of a typical consumer in the form of an income statement, the early moving items tend to be expenses. As consumers, we buy gasoline, bread, and other commodities. As the currency devalues, the prices of these items begin to escalate.
Salaries and other forms of compensation adjust more slowly. No one gets a cost of living adjustment to their salary before the cost of living actually rises. The cost of living rises first. The salary adjustment comes later. That timing difference squeezes consumer purchasing power.
Walmart, Target, Costco, and Carvana have all reported weak earnings over the last couple of weeks; they have all cited changing consumer purchasing patterns as the primary culprit. The U.S. is in the early phases of a devaluation of its currency relative to goods and services. The associated drain in consumer purchasing power has begun.
