You’ve probably seen the headlines about some economists becoming increasingly concerned about inflation. So, should we be concerned? (Note: please keep reading. This is not one of those in-depth analysis involving T-bills and yield-curves, but more of a big picture, horse-sense type of view.)
Definitions
The most basic definition of
inflation is: Too many dollars chasing too few goods.
A more precise definition
from Investopedia:
“Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.”
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| Some inflation can be good |
Complicating Factors
Inflation is inherently
challenging, because it means your money is worth less, because it can buy less
goods or services. However, economists generally believe that a low, and
steady, inflation rate of around 2% is good because it signifies a growing,
healthy economy. Inflation, under control, does help to balance out imbalances
in basic supply and prices.
We have not had to deal with
high inflation for a long time. The last time inflation was above 5% was in
1990. The last time inflation was above 10% was 1980. The Clinton
administration achieved strong economic growth, with low inflation, by
significantly increasing imported low-priced goods from China. Economists
labeled this strategy as “importing deflation”. This strategy worked so well it
has been advanced by every administration since then, except for one. But that’s a political discussion, and I’m not
swimming in that pool.
The other factor limiting
inflation has been technology, especially the tremendous efficiency benefits
provided by the Internet. Technology and the efficiency it provides, lowers
just about every type of cost, thus reducing inflation.
Current Situation
But let’s get back to this
“Too many dollars chasing too few goods” thing. Why are economists concerned?
Too Many Dollars?
The government flooded the
economy with cash in 2020 with the stimulus deals. This helped many people in
financial distress, but many people received checks they didn’t need. Consumers spent this windfall or saved the
money for future purchases. And now, there is even more stimulus money on the
way. From my point of view, there are too many dollars currently in circulation.
This by itself might not be a problem, but...
Too Few Goods?
Ever since the economic
restart, some goods were in short supply. The list included both consumer goods
and industrial goods in an extensive range of industries. For example, there
was a severe shortage of hotel towels in October, and some of those are
produced in Pakistan. And now, there are reports of cat food shortages in some
areas of the country.
While many of the shortages
have been alleviated, some have intensified. We see the headlines for computer
chips and steel, but we know in the commercial equipment industry that these
products and a host of others are in short supply. The supply chain is in a
mess. I’m guessing manufacturing material, and component shortages are in the
worst shape since WWII.
So, we can’t make enough
products to satisfy demand. Combine this with consumer products sitting on
ships for days waiting to dock and then being delayed a few weeks due to port
congestion, and you end up with too few goods. The inventory numbers confirm
this.
What? – Me worry?
Federal Reserve Chairman
Jerome Powell has finally admitted that he expects some inflationary pressure
as the economy reopens but expects it to be temporary. Previously, he said he
is not concerned because inflation doesn’t “change on a dime” and that a return
to standard 2% inflation rates is not a danger. He also thinks the FED will be
able to control the inflation once it starts.
In effect, he is saying they
will be able to control the boulder once it begins to roll downhill.
What happens, however, if
that boulder rolls right over the FED and anything else you put in its way.
It’s like the old Chaka Chan and Rufus song: “Once you get started, oh it’s
hard to stop”. Inflation isn’t something you want to see gaining speed quickly.
Big Difference of Opinion
There are those economists
sounding the alarm based on the factors previously cited and the movement in
the 10-year treasury yield curves. But Chairman Powell and other economists in
the Biden administration say “Move along, nothing to see here”. Of course, they
can’t both be right. So, hope for the best, but be prepared for the worst.
