by Loren Bailey
Senior Wealth Manager
We are in another year! The holiday after Turkey Day, Black Friday, is the traditional kickoff to the holiday buying frenzy. Of course, way before the starter’s pistol was fired, we all noticed the increase in prices; not just in the more obscure goods and services, but in everyday wants and needs. It’s like everything is more expensive, and not just a little…but a lot! What gives? It’s called (drum roll) Inflation. I walked by a newsstand this morning and the headlines read “90% of People Are Worried About Inflation!” I thought “Finally we have a news headline which isn’t shocking!” Yes, we are concerned and we are feeling it. But how do we determine the severity of the situation?
One way to measure inflation is by something called the Consumer Price Index (CPI). At the moment CPI is at 6.2%, meaning that most goods and services increased a whopping 6.2% from this time last year. But, this measure is only somewhat meaningful to the average person because CPI does not measure energy (oil and gas) prices or food prices. If those were factored in, inflation would probably have an even higher number. To be sure, it is not nearly at the levels that we experienced when I was a kid in the 70’s and early 80’s, but it is here just the same (see chart below).
A large reason why we have such elevated costs is because we are coming off of COVID. As a reaction to the pandemic, world-wide production of goods and services were halted, creating pent up demand. And once production resumed, the surge in demand created a shortage of supply. Up to this point, many experts claimed that our current inflation is temporary or “transitory”, because the supply lines will heal as the pandemic fades and world economies stabilize. To demonstrate their point, let’s briefly look at an argument that supports this idea.
Wendy Edelberg, a Director at the Brookings Institute says that most of the factors driving inflation are temporary. Of the four factors shown above, she says that Energy prices (figure C.), while volatile, should lower to pre-pandemic levels once domestic Energy producers see that price levels are not sustainable. The producers will just increase the supply. Although Food prices (figure D.) have risen sharply, it is a global trend related to the pandemic and increases in prices should normalize once people get vaccinated and we get the virus under control. She agrees that the Core Goods (figure A.) increase is dramatically high. In fact, the rate of increase higher than it has been in the last 30 years. But Core Services(figure B.) has resumed its pre-pandemic levels and is in line with its average from the early 1990’s through 2008 (before the housing crash). Of the four areas, she reasons that the primary contributor to current inflation is Core Goods. Real goods spending is up 15% from pre-pandemic levels.
Should we expect continued inflation from Core Goods? Edelberg says no. Reason 1.) much of the price increases are a direct result of the supply chain, which is a result of the pandemic. Once the pandemic recedes and is controlled globally, the supply chain issues will be resolved. Reason 2.) the surge in spending in the goods category will decrease because as the pandemic recedes, there will be increased spending on services, and Reason 3.) the financial assistance provided by the government, which helped finance the increased spending by consumers on goods, is ending. She makes good points. While many experts are in basic agreement, the voices for longer term inflation are growing.
Our demand and willingness to pay for goods dictates what retailers can charge and still make a profit. Yes, prices are high when compared to last year…but people are buying. Amazon reported that they had a record-breaking Black Friday/Cyber Monday weekend is proof in action. Purchasing products despite their level of increase validates the current prices. Translation: there is a good chance that the prices you are current paying for in most products will not be returning to last year’s prices…they are here to stay. But, what about the prices continuing to increase? Where do they go from here? On Thursday, De
cember 1st, Treasury Secretary Janet Yellin came forward and said that she believed that it was time to stop characterizing inflation as temporary. Why? Because the spread of new variants could prolong the issue of rising prices. Our viral concerns are not close to be resolved. “Now the new variant, the Omicron variant – the pandemic could be with us quite some time and hopefully not completely stifling economic activity, but affecting our behavior in ways that contribute to inflation,” she said. She added, “I am ready to retire the word transitory…I can agree that that hasn’t been an apt description of what we are dealing with.” Her remarks were similar to those of Fed Chairman Jerome Powell, who in the past thought it was indeed transitory. But last week, he agreed that it was more than just a short-term issue.
In addition to the COVID effects on the supply chain, there is a shortage of workers. Employees not only want to avoid the potential of a viral working environment, they want higher wages. If companies want to satisfy their labor demands, many will have to provide higher pay. Higher wages usually translate to a higher price for consumers. But there is the possibility of hope. Although they have little control over the pandemic or wages, the Fed can help put the reigns on inflation. They can stop putting money into the economy (they are in the process of doing this by scaling back its monthly purchases of bonds from $120 billion a month to $15 billion). They can also raise interest rates (they are strongly considering this and may do so next year). These are actions that will help them get back to their inflationary goal of 2%. It will also help curtail a longer period of rising prices. Look for them to be more active and hope they get it right.
What actions can you take as an individual? Well, for starters, you can avoid keeping large sums of money in your savings and interest bearing accounts. If you are not going to make a large purchase within the next 3 to 6 months, your buying power will continue to erode if your interest rate it at or near zero. Talk to your financial advisor about options that could give better, longer-term returns…ones that are more likely to keep up with inflation. Will we escape a long-term economic malaise, or will we get it under control? It appears as though inflation may be around for some time but at this point, uncertainty is king! As television programs of yesteryear used to say before they went to a commercial, “Don’t touch that dial…stay tuned!” It’s the only other thing that we can do. If you want to get in touch with us, please fill out the contact form or email us at email@example.com