The dangers are real, but so are the solutions
By Joe Higgins, Quest 4 Quality
If you own a car and commute to work or drive to the store once a week, you are painfully aware of the price of gasoline in your city.
At my home in Washington, a gallon of regular gas has gone up 58.1 percent this year. The cost of meat products in grocery stores has increased 13.3 percent, and produce has jumped 4.1 percent. Unless you avert your eyes when paying for goods today, only then would you think inflation is not a problem.
So, let’s have an honest conversation about the escalating price of goods and services in America.
What is inflation?
Milton Friedman said it most succinctly: “It is when too much money is chasing too few of goods.” Still, it needs more context to understand such a crucial macroeconomic concept.
Inflation is a trend where prices for goods and services increase over a period of time. The length varies, but it is usually more than six months. While there are different indices used to track inflation, the most reliable indicator is the Consumer Price Index (CPI).
When the issue is a significant increase in demand, as we are experiencing today, it causes an imbalance, and we call that “demand-pull” inflation. Inflation also occurs when the price of commodities like copper or wood begin to rise and impact manufacturing costs; we call that type of increase “cost-push” inflation.
According to the U.S. Bureau of Labor Statistics (BLS), the CPI rose 6.8 percent year over year in November, which is the most significant increase since the early 1980s. Also, the Producer Price Index jumped 9.6 percent from last year, representing the largest increase on record.
What is going on in America to create such disruptions in our economy?
First, we are in what I am calling “the spend like crazy economy.” After being stuck in our homes for 18 months, not taking vacations or dining out, Americans have been buying stuff — all kinds of stuff. This year alone, imports are up over 30 percent, retail sales are through the roof, and if you are lucky enough to be in the electronics, appliance, or furniture business, you know Americans are spending in ways we have never seen before. This craziness has been fueled by stimulus money, business loans, and other types of relief to help Americans during the pandemic.
The dynamic increase in demand is not necessarily the cause of inflation. Still, if you add in what is going on in the ports across this country and the disruptions to the supply chains, now you have the classic move to higher prices due to issues in supply and demand. In addition, you have employers offering all kinds of rewards to retain and hire workers; as a result, wages were up 4.8 percent last month. Those in the job market are exuberant over their good fortune, but businesses will pass this added cost to the marketplace.
Next, we need to determine if this price rise is a disaster for our nascent economic boom. The Federal Reserve has been trying to get inflation up to 2 percent for the past ten years under the theory that some rise in pricing is good for our economy. The opposite problem, deflation, is generally a much bigger issue and can lead to corporations cutting back on capital investments due to shrinking profits, which could then cause an increase in unemployment.
However, with inflation now headed to 10 percent, we have a severe problem. For consumers on a fixed income, seniors on Social Security, and Americans with low wages, a rapid increase in prices makes it difficult to stay above the poverty line. A recent Census Bureau survey found that nine percent of adults say they don’t have enough food for their families. So, inflation has wide-ranging implications for America.
There is one more scenario we must consider when discussing price escalation. If inflation is not transitory, as Fed Chairman Powell called it, and it continues for months, it can lead to hyperinflation. This is what happened during the early 1980s in America, when consumers expected prices to rise month over month, and every dollar you held on to lost value every payday. The psychology that fuels this narrative is when consumers believe they need to buy today because prices will be higher tomorrow.
Historically, we have witnessed the currencies of many Third World countries like Venezuela collapse due to hyperinflation. The U.S. economy has never suffered from hyperinflation; there were periods after the Revolutionary War and the Civil War when we got close, but we are nowhere near collapse today. As I discussed in my last article, America’s leading economic indicators are more vital than ever, from unemployment to consumer confidence to consumer spending. We are in record territory, but we still must be vigilant.
This week the Fed announced that it will step in and raise interest rates three times in the coming year. With these moves, Powell’s forecast for 2022 is that inflation will drop to 2.6 percent and the unemployment rate would fall to 3.5 percent. Powell was embarrassed by the rise in prices and his failure to act promptly, and no longer referred to the situation as “transitory.”
The Bottom Line
The Fed needs to move more rapidly in hiking interest rates. Powell should be concerned that prices may not slow down. If inflation remains at its current pace, it could impact our economic expansion. The U.S. unemployment rate is 4.2 percent — nearly full employment — but a rate increase could derail the robust growth of jobs. The impact on the housing market could be a concern, but even if mortgage rates rose to 4 percent, that would still be low by historical standards.
We must address the problems at the ports, all the related supply chain issues, and the severe lack of workers in many industries. This has added to the shortages, and inflation will not subside without improving response times.
With the personal savings rate shrinking and stimulus money mostly gone, the “crazy spending economy” will return to a more normal pace in 2022. Even Lowe’s predicted that their same-store sales would shrink by 3 percent because American consumers could not keep pace with their home improvement spending of the past two years.
We need to give the Fed time to act and get this under control. The new year will be difficult, but our economy’s strength and resilience are unequaled globally.
Joe Higgins is a 42-year veteran of GE and Whirlpool Corp. who brings his experience to bear as a business consultant, public speaker, AVB keynoter and YourSource News contributor. Visit his website, Quest 4 Quality with Joe, at www.q4qwithjoe.com.