The price of eggs and the effect on public sentiment

Inflation is receding and the labor market is as healthy as it has been since the 1950s. Wages are higher in inflation-adjusted terms. Everyone who wants a job either has one or can find one quickly.

And with the economy growing at a healthy rate over the past year, one would think that Americans would be celebrating a boom.

Yet in September, a poll by Sawyer Business School and USA Today found that 70% of Americans believed the economy was getting worse, not better.

Why are consumers so unhappy?

To begin with, it depends on their point of comparison.

If comparing today’s economy to 2019, before the pandemic, the view is bound to be negative. Since 2019, the economy has endured a pandemic, a shutdown in global supply chains, price shocks on the oil and commodity markets, and global turmoil.

But if comparing today’s economy to a year ago, then the view is bound to be positive given the strong labor market, easing inflation and overall growth.

In addition, there is also a sense that consumers, who by most measures are in healthy financial shape, have a dimmer view of the overall economy even though they themselves are doing just fine.

As the saying goes, “It’s a recession for thee, not for me.”

The same disconnect applies to businesses. The fourth-quarter RSM US Middle Market Business Index showed a similar concern for the economy overall, even as executives in the survey had a positive outlook for their own businesses.  

The basis for this outlook is the disconnect between what the data shows and what consumers, and businesses, feel. As economists and strategists point to slowing inflation, consumers still feel the sting of higher prices overall. Prices, after all, do not usually decline.

Consider the price of eggs, which has fluctuated wildly over the past two years. Along with a select number of other goods and services, the price of a dozen eggs illustrates why public sentiment is currently sour. But that sour view is likely to improve as supply conditions continue to improve, inflation growth eases and real wages rise.

The price of eggs

The inability of supply to meet demand during the pandemic shutdown was an obvious reason for staples like eggs to increase in price. For instance, from December 2019 to February 2022, the price of a dozen eggs rose from about $1.50 to $2.00, an increase of 30% over 26 months.

But an avian flu took hold in early 2022 and grew into the largest outbreak in American history. What followed was a widespread culling of the national chicken stock, sending the price of eggs even higher. By January 2023, egg prices had more than doubled, to $4.80 a dozen, in less than a year.

In December, another outbreak of avian flu resulted in an 8.9% increase in the price of eggs on a monthly basis, even as the cost of that good declined 23.8% on a year-ago basis.

If using December 2019 as a starting point, the egg component of the consumer price index was up 36% compared to the recent disinflation in that good of roughly 24% from a year earlier.

The grocery store is not the only place the increase in egg prices is being noticed. Many prepared food items, from hamburger rolls to meatballs to brownies, include eggs as an ingredient.

So the rapid increase in the cost of eating at your favorite burger or Italian joint since 2020 is due in part to the increased cost of eggs and other staples—not just higher labor costs.

The good news is that by the middle of 2023, the average price of a dozen eggs had dropped to $2.21 before moving back up to $2.50 in January.  

Whether that disinflationary trend continues will depend on whether another outbreak of the bird flu occurs.

Without a severe drop in demand for goods and services caused by a deep recession, one should anticipate further modest disinflation in the goods sector and price stickiness in the service sector because of a tight labor market and rising nominal and real wages.

Overall, price levels are higher than they were before the pandemic. While the worst of inflation is behind us, it will take more time for consumers to change their spending patterns or to better absorb those additional costs as wages move higher in nominal and inflation-adjusted terms.

The pricing dynamics in the following sectors are similar to those of eggs and other food staples, underscoring consumers’ sour sentiment.

Energy

For many Americans, inflation is defined by the gasoline prices they see on their way to work every day.

In November, the price of regular gasoline stood in the $3 a gallon range, down from the high of $5.06 on June 13, 2022. That plunge should be a net plus in consumers’ evaluation of the current economy, but for some it is not.

Why is that?

The average price of gas dropped below $2 a gallon in 2020 because of a plunge in demand associated with the move to work at home and the shutdown of global supply chains.

Inflation might seem like a pressing issue if comparing 2020 gasoline prices to prices today.

But those 2020 gas prices need to be viewed in the context of Trump-era emergency policies and the price shocks that followed.

The price of gasoline between 2015 and 2020 averaged $2.44 per gallon, so November’s price in the $3 range after adjusting for inflation does not seem out of line.

As of mid-February, the national average price of gasoline was in the range of $3.25 a gallon but remained 22% higher than before the pandemic. Gas prices declined at an average rate of 9.7% per year last year.

The cost of diesel fuel, a key part of the supply chain, remains 28% higher than before the pandemic but is falling at a rate of 16% per year.  

The price of heating your home with fuel oil remains 24% higher than at the end of 2019 but is falling at a rate of 18% per year. The cost of electricity is 30% higher than 2019 and is increasing by 3.4% per year.

Transportation

Trends in the cost of used cars and trucks are nearly identical to those in the overall cost of transportation commodities, which allows us to use used cars and trucks as a proxy for transportation costs.

The shortage of computer chips during the pandemic delayed the production of new vehicles, which created a surge in demand for used vehicles. As such, the inflation rate for used vehicles peaked at 45% per year in 2021.

Prices of used vehicles remain 31% higher than at the end of 2019 but fell at an average rate of 7.4% per year in 2023.

The shortage of chips also had knock-on effects that included a sell-off of rental vehicles during the pandemic. That resulted in a vehicle shortage once the pandemic ended, which increased the cost of rentals.  

Housing

The tight housing market is a constant reminder of how housing preferences changed during the pandemic, and the end of low-for-long interest rates. This is especially true for young people looking to buy their first home.

Using the housing component of the consumer price index, housing costs are 22% higher than before the pandemic and in January continued to increase at a rate of 4.9% per year.

That the rate of growth is decelerating can be attributed in part to the saturation of demand for housing and to the pause in monetary policy tightening. The prospect of lower interest rates gives prospective buyers the incentive to wait out the eventual easing of long-term interest rates.

Mortgage rates appeared to have finally peaked, but there is no guarantee that the market won’t pick up again in the spring. 

Discretionary spending

Electronics: The cost of cellphone services plunged in 2017 and has pretty much flatlined since then. The cost of cell service was falling at an average rate of 2% per year in the fourth quarter of last year. The cost of buying a television has also continued to drop. In fact, TV prices are 2% lower than before the pandemic and by January were falling at a rate of 9.8% per year.

Airline fares: Finally, the price of taking a vacation has returned to earth. Airline tickets are 2% lower than before the pandemic and by January were falling at a rate of 9.3% per year. We can surmise that the decreased cost is because of a leveling off of demand, with revenge travel having run its course, and as fuel prices have eased.

The takeaway

Prices of most goods and services remain higher than before the pandemic.

Despite a thriving economy, the public has not yet adjusted to the price level shock, and that will simply take time.

While inflation continues to recede, higher prices continue to affect household finances, causing the public to evaluate the economy as sour.

We think that by midyear, many if not most Americans will begin to reshape their evaluation of the economy based on low unemployment, rising real wages and falling interest rates as inflation recedes toward our forecast of 2% by the end of the year.