When bad things happen, we try to find a reason and someone to blame. I think it has always been this way, but now we have the media who know that reporting bad news sells, and naming the person or persons who caused the bad news sells even better. Add that the cable news channels have to provide programming 24 hours each day, so they devote many hours to the blame game.
It’s impossible to not notice that the price of just about everything is rising. We know it as inflation, but we last experienced inflation like this in the eighties. During the five-year periods between 2007 to 2011 and 2017 to 2021 the average annual inflation was 2.4%. The five years between 2012 and 2016 were even lower at 1.3%. Last month, the cost of goods increase was 7.9%.
There are generally two causes of inflation. One is called demand-pull inflation, the upward pressure on prices that follows a shortage in supply. Economists describe this as “too many dollars chasing too few goods.” The other is Cost-push inflation. It occurs when prices rise due to increases in the cost of wages and raw materials.The bad news is that we have both conditions.
Let’s first discuss the demand-pull inflation. Simply, the pandemic caused us to experience dramatic shortages of goods and services. For instance, semiconductors made overseas have not been available so cars can’t be produced. The shortage, of course, has driven up the price. As we hung out in our homes during the pandemic, we decided to upgrade either by buying a new home or by remodeling our current one. New house sales have increased housing prices as have home improvement projects. Food prices are strongly affected by the cost of the logistics involved in their distribution. As the distribution channels were affected by the pandemic, costs have risen.
Beginning in the late seventies, American manufacturers began to practice just in time delivery of raw materials. Instead of warehousing needed materials, companies scheduled them to arrive just when they are needed in the manufacturing process. It’s efficient and its good business… except when it doesn’t work. Vital cogs in the supplier chain have experienced delays as companies shut down during the pandemic.
There is blame to bring to the feet of the Federal Reserve. For many years the Fed has kept interest rates near zero. This penalizes savers and rewards spenders. It’s likely this will soon change. Also contributing to the inflation is the excessive spending of our government. No one doubts that it was right to offer cash to help during the pandemic while many businesses were closed. However, the spending is continuing. Remember our definition…. Too many dollars chasing too few goods. We definitely have both conditions.
I’m sure you hear that America’s front-line workers are not doing well in our economy. Here’s proof. In 1973 the real hourly earnings of production and non-supervisory employees was $23.24. In March of 2019 it was exactly the same…. No progress for workers in over 40 years. The same measure in January of this year is $26.86…up 15.6%. This is happening because the worker shortage is driving up wages. Given that there is a labor element in most products, these labor increases will continue to drive inflation. So, we have cost driven inflation factors as well as demand pull.
The summary leads me to believe that this inflation is caused by many factors which are coming together… a perfect storm. The future interest rate increases will help, but higher prices are probably here to stay.
Jim Rohrer of Evergreen is a business consultant and author of the books “Improve Your Bottom Line … Develop MVPs Today” and “Never Lose Your Job … Become a More Valuable Player.” Jim’s belief is that common sense is becoming less common. More about Jim at www.theloyaltypartners.com.