Are rich baby boomers driving inflation?

America’s wealthiest generation may be contributing to the country’s longest bout of high inflation in more than three decades.

According to Ed Yardeni, the chief investment strategist of Yardeni Research, baby boomers have accumulated a staggering $76 trillion in net worth. And a meaningful chunk of this wealth is now being spent.

Baby boomers “are spending on restaurants, cruises, traveling, and healthcare. All these services industries have been expanding their payrolls, thus boosting real incomes, and fueling more spending,” Yardeni wrote.

While boomers were well on their way to becoming America’s richest retiring generation, they’ve benefited from massive gains in the stock and housing market since the pandemic.

Since the end of 2019, the S&P 500 has risen by a staggering 68%, while average home prices have appreciated by nearly 29%. That explains why older boomers have added more than $14 trillion to their net worth over the past five years.

They now account for nearly one-third of the country’s net worth despite only being 11% of the population.

While a boomer spending spree is good for the economy, it’s going to make it much harder for the Fed to tame a “sticky” category of inflation.

Service inflation remains “sticky”

With all that spending on experiences, it’s no surprise that economists have complained about “sticky” service inflation keeping costs elevated.

According to Fitch Ratings, service inflation is expected to remain elevated because “services industries are more labor-intensive than the goods sector, and tight labor markets and high wage inflation are having a bigger impact.”

In many cases, the consumer pays the cost of rising wages through higher prices.

Research from KPMG also found that service inflation hasn’t been affected by the recent uptick in unemployment. “This is a tough needle to thread,” KPMG analysts wrote, referring to the Fed’s ability to cool service inflation without causing a spike in unemployment.

On June 12, the Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose by 3.3% in May, which was slightly below forecasts. But service inflation, excluding energy services, rose by a massive 5.3% year-over-year.

The stubbornness of service inflation likely means interest rates will have to remain elevated to achieve the Fed’s 2% inflation target, according to analysts at the Bank for International Settlements (BIS).

The BIS analysts warned that getting service inflation back in line could be difficult since Covid “put the relative price levels between goods and services out of whack.”