One of my sources pointed out that a long-time family-owned delicatessen in Oakland was closing for reasons they cite as the rise in the minimum wage coupled with increasing rent. The owners apparently didn’t see a way to compete against the chains like Subway. So I’m left wondering if they: 1.) stopped to realize that competitors will all have the same problem, and 2.) had they considered raising their prices to accommodate their increased costs. It’s hard for me to imagine that a neighborhood tuna sandwich priced at $6.50 instead of $5.00 would prompt customers to drive across town to buy at a fast food outlet. Considering the steady stream of people trooping into Starbucks to spend $3.00 on a cup of coffee they could make at home for ten cents, many habitual purchases that are just not price sensitive.
Where this would matter to retirees, or those preparing for retirement, lies in speculating what living on a fixed income will look like in an economy influenced by cost-push inflation.
Speaking as a small business owner myself, I will say that one of the scariest business decisions involves the question of when and how much to increase prices. The fear, of course, is that customers/clients will leave in droves if prices increase. The status quo is at least a bird in the hand which beats presiding over the specter of a company collapse. The “status quo bias” is part of the human condition. Throughout the business community, whether we’re talking about professionals, commercial establishments, the food industry, or manufacturing companies, raising the prices of products and services is always a “knee-knocking” decision. Most owners wait too long.
As for the rising costs of labor for those who have employees earning the minimum wage, or in neighborhoods where rent is going through the roof, it should be of some relief to realize that your competitors have the same problem. The California $10 minimum wage will be rising to $15 for everyone soon enough. But small businesses competing with each other have what amounts to an oligopolistic situation whereby, without exactly colluding, they effectively set prices by seeing what they all have to charge to stay in business. It explains why Fords, Chevy’s and Plymouths back in the day all sold within a few $100 dollars of each other, legally --- without resorting to illegal price-fixing.
What we may be heading into is an atmosphere of “cost-push” inflation. “Cost-pull” inflation, by comparison, occurs when demand for a product or service is high and prices rise because there’s a shortage of product. Try pricing a home or a remodeling project in the Bay Area right now for a taste of what that feels like. Meanwhile, the alternative, inevitable cost-push inflation due to increasing costs as a result of a rise in the minimum wage should not cost jobs if other states are any example. Instead, prices by necessity will go up. Consumers will suck it up and bear the increased price of the sandwich, coffee or head of kale.
For retirees living on a fixed income or a combination of investments with no protection against inflation, either cost push or demand pull inflation can be a problem. Social security, if it’s not privatized and replaced by vouchers, has built-in cost of living increases, but many retirees are prompted to buy annuities, CD’s or bonds offering no inflation protection. Popular new target date retirement funds allocate far too much money to bonds.
If inflation persists at 3 percent over the next fifteen years, today’s $1,000 will only buy about $600 worth of goods in fifteen years. Anyone not protected has effectively “lost” almost half their money. Investments both before and throughout retirement have to include typically a 50 percent allocation to large-company stocks and/or real estate both of which typically rise in value at 7 percent over the rate of inflation (normally 3 percent.) With half the portfolio growing at 10 percent, and the second half just producing income (but no growth) from bonds, the 10 percent on the growth half amounts to 5 percent as a return on the entire nest egg. This should more than compensate for what some feel will be an adverse impact of the increased minimum wage on inflation rates.