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High inflation is taking a toll on energy and housing markets

MARY LOUISE KELLY, HOST:

This is a fragile moment for the U.S. economy. Now, maybe you haven't been tracking every headline on inflation or whether a recession is coming, but chances are you've felt it in your everyday life. So many of us are feeling the rise and rise of the cost of gas and groceries. Here's Kim Boader, who we caught filling up her tank in Harlem.

KIM BOADER: It's disgusting. Like, people have to really decide on whether to buy food or to buy gas to get to work to get to the food. It's really ridiculous.

KELLY: What's interesting is that many people feel anxious even though the job market is strong. Here's Shannon Carr, who runs a nonprofit that helps needy families in Cincinnati.

SHANNON CARR: We used to just feed homeless people. We're taking meals to families now with children, the working poor, because people are having to choose between healthy food and, you know, things that they can afford.

KELLY: And another worry - that the Federal Reserve's efforts to combat inflation could tip the economy into recession. Utah realtor Kenny Purcell says rising interest rates are already taking a toll on the housing market.

KENNY PURCELL: This is real-life stuff. This is young families, people that were barely getting in before in the dream of homeownership. And they're watching it go away.

KELLY: From housing to food to transportation, we are going to talk through where the economy is right now with three NPR colleagues - Brittany Cronin, who covers energy, Chris Arnold who reports on housing, and Scott Horsley, who covers the economy big-picture. Welcome to all three of you.

CHRIS ARNOLD, BYLINE: Hey, Mary Louise.

BRITTANY CRONIN, BYLINE: Hey there.

KELLY: All right, Scott, you start. We'll go big picture first. We've mentioned inflation. We've mentioned how high prices are. Is that affecting what people buy?

SCOTT HORSLEY, BYLINE: So far, inflation has not put much of a dent in consumer spending. And that's important because that is the big driver of the U.S. economy. Obviously, the people who feel it most are those who are just getting by. McDonald's says some of its most price-sensitive customers have started to downsize their orders. Walmart says some grocery shoppers are switching to cheaper store brands. Shannon Carr, who talked to our colleagues at Weekend Edition Sunday about shopping at Dollar Tree stores in Cincinnati, says she's seeing long lines there, even though Dollar Tree famously raised its prices to a dollar and a quarter late last year.

CARR: The prices at the other stores are extremely high, so you have to choose your battles. And Dollar Tree - you know, at least it's under $5, right?

HORSLEY: Low-income families tend to suffer most during inflation for a couple of reasons. First, a lot of what they buy is necessities, so there's not a lot of opportunity to cut back. And secondly, they often pay higher prices even for the same items. They might not have the money or the gasoline to drive to Costco and get a bulk discount, for example.

KELLY: Yeah. Speaking of gasoline, Brittany, I want to bring you in here because anybody who's filled up their car recently knows prices are - just skyrocketed. You've also been reporting, though, on the cost of diesel, which is so critical for trucks and truck drivers. What is going on there?

CRONIN: Yeah. So diesel prices hit their highest level ever in the past week. So I spoke with Eric Jammer. He owns and operates a massive heavy-haul truck out of Houston, Texas.

ERIC JAMMER: At first, it was sticker shock because, you know, you hit that point where, you know, God, this is what it used to take to fill up, and this thing is still going. Holy crap. It's not stopped yet. It's $800. And you're like, OK, I got to do this again tomorrow.

CRONIN: And diesel prices are skyrocketing in part because of Russia's invasion of Ukraine. And also, the U.S. is exporting more diesel to Europe to help reduce its reliance on Russian fuel. And so as diesel prices go up, so do prices of the goods these trucks haul, much like at those $1.25 stores that Scott mentioned.

KELLY: The $1.25 stores, yeah. They may need to rebrand. You know, we were talking about the high prices at grocery stores, even at places like McDonald's. What about the people, Brittany, who grow the food? Talk to me about how farmers are affected by all this.

CRONIN: Farmers are up against really high costs. Some of that is diesel for the tractors, tillers, sprayers, harvesters. I spoke with Phil Fuhr. He's a sixth-generation corn and soybean farmer in western Illinois. And he says the price of diesel - yeah, it's a bitter pill to swallow, but it's not the thing that hurts him the most.

PHIL FUHR: Fertilizer price is the thing that has really - I'm going to say it's gone off the tracks.

CRONIN: Fuhr says that's typically the biggest expense on the farm. And he's paying double what he did last year. Now, both Russia and Ukraine are major exporters of fertilizer. Russia is, of course, facing heavy sanctions. That drags down the global supply of fertilizer, pushing up food prices here at home.

KELLY: So interesting. All right. Scott Horsley, what's it going to take to bring down inflation? How does this end?

HORSLEY: Well, it's a case of supply and demand. For over a year now, demand has been outstripping supply. That's why prices have been going up. It would have been nice and relatively painless if supply had just caught up and inflation had come down on its own. That's what the Federal Reserve was hoping for for much of last year. But that didn't happen. So now the central bank is deliberately trying to tamp down demand by making it more expensive to borrow money. And that is not painless. It means higher costs for credit card balances and car loans and especially mortgages.

ARNOLD: Yeah, mortgages - extremely painful right now for people trying to buy a house. That is absolutely true.

KELLY: Yeah. Chris Arnold, jump in here.

ARNOLD: Thanks. We should say that during the pandemic, home prices themselves went up 30% just in two years, which is a massive move. And now on top of that, with the Fed raising interest rates, it's magnifying the cost of buying. Mortgage rates move a lot in times like this because the market anticipates what the Fed is going to be doing over the next year, and they adjust quickly. So rates have gone from less than 3% this past summer to above 5%. What that means, if you do the math on that - and for a $500,000 loan, it's more than $600 a month more in monthly payments to buy that same house now.

KELLY: Which is not nothing. That's not spare change. I mean, the bottom line then is - what? - fewer people can afford to become homeowners now.

ARNOLD: Right. And the numbers out today show that there are fewer people buying new construction homes. And, actually, some people who've signed contracts to buy a new construction home - there have been delays. We've all heard about the supply chain problems. And so now it's six months or a year later, and they thought they could buy this house. But now rates are so much higher, and they can't qualify to get a mortgage. So they can't buy the house. I talked to Kenny Purcell, a realtor in Spanish Fork, Utah, about this.

PURCELL: We've had 10 people we've been working with that are canceling right now. There's a lot of tears shed. You have real empathy for these people. But the problem is, too, Chris, is rent prices are so high right now as well. You know, they can't afford to stay in their rental. They can't afford to lose their construction deposit or their earnest money. They're in a real pickle.

ARNOLD: And he says he's got homebuyers with deposits of upwards of $20,000. And they're worried they're going to lose that money because they're going to have to back out of buying these houses.

KELLY: I mean, I suppose the thing here is - Scott Horsley, I'm going to give you the last word. This is the system working, right? This is what the Fed is trying to do - is make it more expensive to borrow money because that's how they're hoping to cool off inflation.

HORSLEY: That's right. And the challenge is to cool off inflation without putting the economy itself into a deep freeze. The Fed has made it clear it's willing to tolerate some short-term pain if that's what it takes to get prices under control. One positive note - most Americans came into this year in relatively good financial shape with some extra money in the bank. So they do have some financial cushion to help them weather this rough patch.

KELLY: All right. Thanks to you all. We've been talking with NPR's Scott Horsley and Brittany Cronin and Chris Arnold. Thank you.

HORSLEY: Thanks, Mary Louise.

CRONIN: Thanks so much.

ARNOLD: You're welcome. Transcript provided by NPR, Copyright NPR.