Inflation

November 13, 2021

Inflation is taking center stage as a political issue, pushing aside wokeness, Critical Race Theory, and COVID. Nothing focuses one’s attention more than price increases at the pump. The price of gas goes up, and pundits predict the end of life as we know it. This is not to trivialize the financial pain that consumers feel when trying to buy the essentials of life like food, clothing, housing, and energy. However, I think we all have to take a collective breath, deflate, and try to put things in perspective.

The long-term trend in inflation since WW II has is 3.6%. From 2000-2008, the rate was 2.9%. The anomaly has been the last 12 years when the rate of inflation has been an historically low 1.5% with a concurrent drop in long-term interest rates. We have been spoiled by or, at least, complacent about low inflation rates.The Great Recession put a huge hole in demand. This wasn’t going to last forever. The pandemic just delayed the inevitable.

The world has changed as we work through the worst pandemic since 1918, and it is not going back to normal. Supply chain issues exist all over the world. People are changing their buying habits. They are buying more goods than services, which need to be delivered. Workers are right-sizing themselves. Non-essential workers were essential after all, and want to be paid. They are quitting in droves for better paying jobs, which is putting more money in their pockets. Through forced savings and government largesse, consumers are flush with cash and pent up demand. It may take time, but it will work itself out. I don’t see 18% interest rates, or long gas lines as we did in1979 in our future. We may have some long faces at Christmas, but at least they will be vaccinated.