Markets
Consumer Price Inflation, by Type of Good or Service (2000-2022)
Consumer Price Inflation, by Type of Good or Service (2000-2022)
The Consumer Price Index (CPI) provides a steady indication of how inflation is affecting the economy. This big picture number is useful for policymakers and professionals in the financial sector, but most people experience inflation at the cash register or checkout screen.
Since the start of the 21st century, U.S. consumers have seen a divergence of price movements across various categories. Nowhere is this better illustrated than on this chart concept thought up by AEI’s Mark J. Perry . It’s sometimes referred to as the “chart of the century” because it provides such a clear and impactful jump-off point to discuss a number of economic forces.
The punchline is that many consumer goods—particularly those that were easily outsourced—saw price drops, while key “non-tradable” categories saw massive increases. We’ll look at both situations in more detail below.
Race to the Top: Inflation in Healthcare and Education
Since the beginning of this century, two types of essential categories have been marching steadily upward in price: healthcare and education.
America has a well documented “medical inflation” issue. There are a number of reasons why costs in the healthcare sector keep rising, including rising labor costs, an aging population, better technology, and medical tourism. The pricing of pharmaceutical products and hospital services are also a major contributor to increases. As Barry Ritholtz has diplomatically stated, “market forces don’t work very well in this industry”.
Rising medical costs have serious consequences for the U.S. population. Recent data indicates that half of Americans now carry medical debt, with the majority owing $1,000 or more.
Also near the top of the chart are education-related categories. In the ’60s and ’70s, tuition roughly tracked with inflation, but that began to change in the mid-1980s. Since then, tuition costs have marched ever upward. Since 2000, tuition prices have increased by 178% and college textbooks have jumped 162%.
As usual, low income students are disproportionally impacted by rising tuition . Pell Grants now cover a much smaller portion of tuition than they used to, and the majority of states have cut funding to higher education in recent years.
Globalization: A Tale of Televisions and Toys
Even though essentials like education and heathcare have rocketed up, it’s not all bad news. Consumers have seen the price of some goods and services drop dramatically.
Flat screen televisions used to be a big ticket item. At the turn of the century, a flat screen TV would cost around 17% of the median income of the time ($42,148). In the early aughts though, prices began to fall quickly. Today, a new TV will cost less than 1% of the U.S. median income ($54,132).
Similarly, cellular services and software have gotten cheaper over the past two decades as well. Toys are another prime example. Not only are most toys manufactured overseas, the value proposition has changed as children have new digital options to entertain themselves with.
Over a long-term perspective, items like clothing and household furnishings have remained relatively flat in price, even after the most recent bout of inflation.
Technology
Timeline: The Shocking Collapse of Silicon Valley Bank
Silicon Valley Bank was shuttered by regulators becoming the largest bank to fail since the height of the Financial Crisis. What happened?
Timeline: The Shocking Collapse of Silicon Valley Bank
Just days ago, Silicon Valley Bank (SVB) was still viewed as a highly-respected player in the tech space, counting thousands of U.S. venture capital-backed startups as its customers.
But fast forward to the end of last week, and SVB was shuttered by regulators after a panic-induced bank run.
So, how exactly did this happen? We dig in below.
Road to a Bank Run
SVB and its customers generally thrived during the low interest rate era, but as rates rose, SVB found itself more exposed to risk than a typical bank. Even so, at the end of 2022, the bank’s balance sheet showed no cause for alarm.
As well, the bank was viewed positively in a number of places. Most Wall Street analyst ratings were overwhelmingly positive on the bank’s stock, and Forbes had just added the bank to its Financial All-Stars list .
Outward signs of trouble emerged on Wednesday, March 8th, when SVB surprised investors with news that the bank needed to raise more than $2 billion to shore up its balance sheet.
The reaction from prominent venture capitalists was not positive, with Coatue Management, Union Square Ventures, and Peter Thiel’s Founders Fund moving to limit exposure to the 40-year-old bank. The influence of these firms is believed to have added fuel to the fire, and a bank run ensued.
Also influencing decision making was the fact that SVB had the highest percentage of uninsured domestic deposits of all big banks. These totaled nearly $152 billion, or about 97% of all deposits.
By the end of the day, customers had tried to withdraw $42 billion in deposits.
What Triggered the SVB Collapse?
While the collapse of SVB took place over the course of 44 hours, its roots trace back to the early pandemic years.
In 2021, U.S. venture capital-backed companies raised a record $330 billion —double the amount seen in 2020. At the time, interest rates were at rock-bottom levels to help buoy the economy.
Matt Levine sums up the situation well: “When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is “we will lose money for a decade building artificial intelligence, and then rake in lots of money in the far future” sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off.”
| Year | U.S. Venture Capital Activity | Annual % Change |
|---|---|---|
| 2021 | $330B | 98% |
| 2020 | $167B | 15% |
| 2019 | $145B | 1% |
| 2018 | $144B | 64% |
| 2017 | $88B | 6% |
| 2016 | $83B | -3% |
Source: Pitchbook
Why is this important? During this time, SVB received billions of dollars from these venture-backed clients. In one year alone, their deposits increased 100%. They took these funds and invested them in longer-term bonds. As a result, this created a dangerous trap as the company expected rates would remain low.
During this time, SVB invested in bonds at the top of the market. As interest rates rose higher and bond prices declined, SVB started taking major losses on their long-term bond holdings.
Losses Fueling a Liquidity Crunch
When SVB reported its fourth quarter results in early 2023, Moody’s Investor Service, a credit rating agency took notice . In early March, it said that SVB was at high risk for a downgrade due to its significant unrealized losses.
In response, SVB looked to sell $2 billion of its investments at a loss to help boost liquidity for its struggling balance sheet. Soon, more hedge funds and venture investors realized SVB could be on thin ice. Depositors withdrew funds in droves, spurring a liquidity squeeze and prompting California regulators and the FDIC to step in and shut down the bank.
What Happens Now?
While much of SVB’s activity was focused on the tech sector, the bank’s shocking collapse has rattled a financial sector that is already on edge.
The four biggest U.S. banks lost a combined $52 billion the day before the SVB collapse. On Friday, other banking stocks saw double-digit drops, including Signature Bank (-23%), First Republic (-15%), and Silvergate Capital (-11%).
| Name | Stock Price Change, March 10 2023 | Unrealized Losses / Tangible Equity |
|---|---|---|
| SVB Financial | -60%* | -99% |
| First Republic Bank | -15% | -29% |
| Zions Bancorp | -2% | -47% |
| Comerica | -5% | -47% |
| U.S. Bancorp | -4% | -55% |
| Fifth Third Bancorp | -4% | -38% |
| Bank of America | -1% | -54% |
| Wells Fargo | 1% | -33% |
| JPMorgan | -1% | -21% |
Source: Morningstar Direct. *Represents March 9 data, trading halted on March 10.
When the dust settles, it’s hard to predict the ripple effects that will emerge from this dramatic event. For investors, the Secretary of the Treasury Janet Yellen announced confidence in the banking system remaining resilient, noting that regulators have the proper tools in response to the issue.
But others have seen trouble brewing as far back as 2020 (or earlier) when commercial banking assets were skyrocketing and banks were buying bonds when rates were low.
The whole sector is in crisis, and the banks and investors that support these assets are going to have to figure out what to do. -Christopher Whalen, The Institutional Risk Analyst
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