CHARLOTTE – North Carolina’s economy is undergoing a period of time unlike anything else on record, and household budgets are taking a hit due to the continued inflation in the economy.
That’s according to John Connaughton, a professor of financial economics at the University of North Carolina Charlotte, who delivered a quarterly economic update virtually on Thursday.
“It’s been 40 years since we’ve seen inflation this high,” said Connaughton in delivering a presentation as a part of the North Carolina Economic Forecast. According to Connaughton, North Carolinians have lost about 4% of purchasing power in the prior two years.
The economy is also at risk of further inflationary pressures, beyond the supply and demand factors that contribute to rising prices, said Connaughton. There’s a third type of problem in our economy, said Connaughton, noting that is that many companies and many households now have an expectation of rising prices, which could continue to mean that prices of goods will rise.
While wages have increased over the last two years, the cost of goods has increased faster, according to John Connaughton, UNC Charlotte economist. Screenshot of a slide from the North Carolina Economic Forecast, Sept. 22, 2022.
A disconnect in NC economy
And through the first two quarters of the year, both in the national economy and in North Carolina’s economy, said Connaughton, there’s been a “disconnect” between what’s happening with gross domestic product, or GDP, a measure of economic activity, and what’s happening with the labor market and employment.
“This is going to be a story,” said Connaughton, noting that the data shows that the employment growth rate, even with layoffs in some sectors of the economy, is almost double North Carolina’s GDP growth rate.
But Connaughton’s forecast is that this gap will close by the end of 2023, with the model anticipating modest growth in both areas through December 2023.
According to Connaughton, 2023 will be “a less volatile year than we had in 2022 as we start to more evenly match supply and demand.”
While total economic growth in 2023 is expected to reach 1.8% in North Carolina, the labor market is expected to increase at a rate of 1.5%, according to Connaughton’s forecast.
Inflation, supply chain are still big concerns
Still, there are multiple issues that could disrupt the nation’s economy, and also North Carolina’s economy, said Connaughton.
There are known concerns, including the ongoing supply chain issues from baby formula to automobiles and everything in between. There may continue to be supply chain issues, across a variety of industries, so even though this is a known concern, it may be difficult to anticipate the specific areas or industries that could be impacted by shortages.
But a chief concern that is well-known is inflation, said Connaughton.
“We’ve got an inflationary problem, and that’s not going away anytime soon,” said Connaughton. “A stubborn, stubborn problem.”
The latest data from the U.S. Bureau of Labor Statistics showed that the inflation rate remained above 8% year-over-year in August, with an inflation rate of 8.3% calculated in the Consumer Price Index.
And that persistent inflation rate contributed to the decision by the Federal Reserve to increase interest rates by three-quarters of one percent or 75 basis points on Wednesday. That’s the third 75-basis point increase this year. Some have worried that continued rate increases may lead to a crash in U.S. housing markets.
“We’re seeing very little change, and it’s not clear that we’ve reached peak inflation at this time,” said Connaughton. “Inflation is really the cause of the economic problems that we’re having right now.”
And more interest rate increases could be coming, said Connaughton. That’s because there are already expectations that the Federal Reserve will raise rates by 50-basis points two more times this year.
“We think we know something about Fed interest rate policy,” said Connaughton. “But really, we don’t.”
And, further, inflation is still likely to be more than 7% year-over-year at the end of this year, said Connaughton.
Screenshot of a slide from the North Carolina Economic Forecast, Sept. 22, 2022.
