Is Inflation Always Bad news?
The short answer is usually but not always. Let’s take our current scenario. This inflation trend started on the supply side. In other words, there was not enough workers to go around (and some other stuff as well). Therefore, employers had to pay people more money to attract workers from other companies or keep their own from leaving for higher pay somewhere else. In this scenario, the people of America have more money to spend. When that happens, people spend more for the exact same things. That causes prices to go up simply because people can afford it. If the Government sent out a check for $1,000,000 to everyone in America, how much do you think a hot dog would cost?
At the end of 2020, we as a country were in that exact scenario.
- People got paid more for the same job and received stimulus checks for no reason at all. Therefore, while prices were increasing, people’s income had increased more than the prices had increased (inflation). Therefore, inflation happened, but no one was hurt (mostly).
- During that time, people’s houses increased in value, while the monthly mortgage payment remained the same. Therefore, people were no longer upside down on their home and could sell it without being foreclosed on. That’s good news.
- The federal Government, which owes everyone in the world a huge debt, gets to pay it back with dollars that are not as valuable as they were before. Therefore, Americas Giant debt, is now slightly less giant.
That is when inflation is kind of a good thing.
2021 was a very different story.
- Spending: Uncontrolled government spending infused trillions of freshly printed dollars into the economy, paid to giant companies that build roads, bridges, etc. Those companies buy the same things that regular people do, but they can pay a lot more for it. That causes prices to go up.
- Restrictions: Government restrictions to energy caused a reduction in the American supply of oil, coal, natural gas, and as a result gasoline, which caused prices of energy to increase. If the price of energy increases, everything that uses energy to produce causes the price of literally everything to go up. Sanctions on Russia caused a further reduction in oil and gas supply to the world.
- Food: 25% of the world’s wheat comes from the Ukraine (Who knew?). Ukraine is a little busy at the moment fighting for their survival, so we can assume that they haven’t had time to plant their crops or harvest them. Therefore, we can assume that the world’s supply of wheat will drop significantly.
So, when prices were going up because labor prices were increasing, that caused inflation; but people working at higher wages still ended up with enough extra income to pay the higher prices and thus stay even or even get ahead!!
Now that other government decisions have drastically increased the cost of energy, that has caused massive inflation on everything else, which are not absorbed by the higher wages.
Add to that, China and their lock downs of entire regions to fight off COVID. We buy sooooo much stuff from China. When they stop producing, for any reason, that causes further reduction in supply, which causes increases in prices.
What we have now is runaway inflation. This scenario is bad, really bad.
What to do about it? Well, assuming the government stops its runaway spending and intentional supply constrictions. We can either pull cash out of the market, by higher interest rates, taxes, etc. Any of these things will likely result in a massive recession. Or just let the extra cash run its course. Eventually, the new prices for stuff will stabilize and that will represent the new normal. Who cares if a starter house cost $1,000,000 if minimum wage is $100 per hour? It all comes out in the wash.
The most important step is to stop runaway government spending and Government restrictions that constrict the supply chain. The rest will fix itself. That’s the best thing about capitalism. It fixes itself as soon as you stop screwing it up.
Danger Dave Glauber, MBA, MAI, Economist
