Inflation Is Temporary…This Time
The newest numbers from the Bureau of Labor Statistics shows 6.8% inflation as of November for the year.
Inflation has not been so high in almost 40 years. The news media is making much more out of this than what the numbers signify. This is unlike the 1970s and early 1980s when those inflationary trends were mainly due to oil prices being raised by producing countries.
Then oil and other energy costs were a much bigger share of the average family’s budget than today. Until 1974 and the Israeli/Arab war, oil averaged $4.50 per barrel or about 11 cents per gallon on the wholesale market. It did not make much sense to conserve usage or to alter wasteful manufacturing processes. As the price of oil rose, so too did inflation. Every petroleum product and process contributed to price creep.
We had a similar shock in 1979 when another Arab oil boycott ensued. Again, inflation reared its head and energy prices became the crisis that brought on the recession of that time. Paul Voelker, the head of the Fed, promised to wring inflation out of the economy and the way he did was by tight money supplies.
Our inflation is nowhere near as bad today as it was then. Then, it was systemic now it is because of market demands. As Covid raged and continues to rage through the world, the markets need to adjust to a different consumer economy. For the 40 years from 1980 until 2020, the American economy was based on purchasing things for outside the home use.
If you use income for three meals a week in restaurants and takeout, a person’s discretionary spending is supporting the service industry. Once Covid, hit we hunkered down and began buying things for home use. The equilibrium that the economy had no longer applied.
For instance, the media told us there would be shortages of meat. The public anticipating the shortages and hurried to buy every freezer in stock. Backorders became common. Empty meat counters were shown on the news, precipitating more panic buying. The same thing occurred with paper towels, toilet paper and tissue.
When things are in demand, prices go up. There is nothing revolutionary about that. As Covid went on and we spent more time in our homes, home improvements and electronics were in high demand. Because we are part of a world economy, if a plant closes in Vietnam because of Covid, it affects many other businesses, and the supply chain breaks down.
At the same time, as restaurants closed to reduce Covid spread, those workers ended up unemployed. Restaurant supply businesses saw their sales plumet, resulting in excess capacity in this sector while shortages for similar products occurred in the home sector.
The market is now beginning to adjust and even out. This is borne out by lumber prices, while still historically high, are no longer at their peaks. Material that was unavailable a short time ago is now back on shelves.
Americans need not panic for this is not the Weimer inflation of the early 1920s or even that of the 1970s. If we do not panic and leave the market alone, the prices for products, commodities, and labor will find equilibrium. Going forward Covid, which is turning into an endemic problem, will be priced into the economy.
Covid may cause temporary and geographically limited shutdowns but nothing like what occurred in 2020. The vaccines and boosters are the greatest help to the economy in keeping production continuing even during spikes. If we can keep factories and businesses operating, then price increases due to shortages should not occur.
Within the year, we will probably see inflation subside as we work through the shortages. Government spending is not the cause, nor can any actions taken by the government make inflation better. By acting, government can only make matters worse.