Taco Inflation

by | Dec 13, 2022

For many years, one of my lunch options was a great taco cart on Church Street outside our offices. An independent business owned by Carlos and his cousin Sebastian, they served three tacos with rice and beans for $6 cash plus a tip for whoever was manning the grill that day.

Sadly, the pandemic put an end to my taco routine. When I returned to the office in 2020, there still were not many office workers in New Haven. The taco cart disappeared.

Thankfully, there’s a happy ending, as we learned they are still in business and relocated to just outside Ingalls Rink (the “Whale”). The walk is a little longer, but on a nice fall day it’s a terrific way to get some exercise at lunchtime.

On my recent trip, I ordered my favorite (carnitas, by the way). Times have changed and now they take credit cards using an iPad. Something else had changed, too. Tacos were now $10 plus tax, and don’t forget the 20% tip that the iPad helpfully suggested. Over the course of less than 3 years, inflation has made my lunch cost increase 78%. Inflation is real, and for many it’s a real problem.

The headline inflation rate versus a year ago is 8.2% as of 8/31/2022. The biggest components in the inflation basket are food, housing, and energy. Dining out is what I experienced first hand with my tacos. We’re also reminded of this every time we go to the grocery store.

Since the start of the Covid 19 pandemic, central banks created as much as $11 trillion in new money. The resulting tsunami of money drove up the price of assets including stocks, bonds, and even the US housing market. In 2020 and 2021, the owners of these assets benefited via increased prices.

In 2022, a series of global supply chain issues, combined with the large increase in money supply, resulted in the highest inflation since the 1980s. China’s zero tolerance policy for

Covid contributed to shipping and manufacturing woes. Putin’s war in Ukraine caused significant increases in food and energy prices. Wages followed prices upward, entrenching inflation in a way that made it more likely to be persistent than transitory.

The Federal Reserve has made clear that controlling inflation is their top priority. After all, inflation of 3% erodes the value of money by 25% over a decade. Increase that to the 7% 12-month headline inflation experienced this summer and over the same 10 years you would lose half the value of your money. For those living off a fixed income or cash savings, the impact of this can be devastating. No wonder the Fed is willing to risk a recession and falling asset prices to put the inflation genie back in the bottle.

One of the reasons we prefer that people own their home in retirement rather than rent is they can control their costs. Property taxes and upkeep may rise, but a fixed mortgage rate (or better yet, no mortgage) means this cost doesn’t change as much as the inflation index would show. Renters and those who move are hit harder.

Back to my tacos, their inflation since my last visit (admittedly not a 12-month period) was 78%. But if the tacos still cost $10 a year from now, the 12-month inflation will have stabilized at 0%. Will the same math apply in 12 months’ time to the consumer price index?

There are early signs that inflation is easing in some areas, but sticky in others. Gasoline prices in Connecticut declined to an 18-month low.

Home and rent prices came down in August. It is early, but these are signs that inflation may be moderating. On the other hand, wages and the price of many consumer staples may be stickier, causing many to be concerned that high inflation will be here to stay.

Our best guess is that we may have passed ‘peak’ inflation, but that it may remain at levels of above what we have become accustomed to in recent years for some time. Long term, the best defense against inflation is to make sure your assets grow faster than it.