Ake's Take: Are the Fears Inflated?

You’ve probably seen the headlines about some economists becoming increasingly concerned about inflation. So, should we be concerned?  (Note: please keep reading. This is not one of those in-depth analysis involving T-bills and yield-curves, but more of a big picture, horse-sense type of view.)

Definitions

The most basic definition of inflation is: Too many dollars chasing too few goods.

A more precise definition from Investopedia:

“Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.”

Complicating Factors

Inflation is inherently challenging, because it means your money is worth less, because it can buy less goods or services. However, economists generally believe that a low, and steady, inflation rate of around 2% is good because it signifies a growing, healthy economy. Inflation, under control, does help to balance out imbalances in basic supply and prices.

We have not had to deal with high inflation for a long time. The last time inflation was above 5% was in 1990. The last time inflation was above 10% was 1980. The Clinton administration achieved strong economic growth, with low inflation, by significantly increasing imported low-priced goods from China. Economists labeled this strategy as “importing deflation”. This strategy worked so well it has been advanced by every administration since then, except for the previous one.

The other factor limiting inflation has been technology, especially the tremendous efficiency benefits provided by the Internet. Technology, and the efficiency it provides, lower just about every type of cost (except direct personal services), thus reducing inflation.

Current Situation

But let’s get back to this “Too many dollars chasing too few goods” thing. Why are economists concerned?

Too Many Dollars?

The government flooded the economy with cash in 2020 with the stimulus deals. This helped many people in financial distress, but some people received checks they didn’t require.  Consumers spent this windfall or saved the money for future purchases. And now, there is even more stimulus money on the way. From my point of view, there are too many dollars currently in circulation. This by itself might not be a problem, but…

Too Few Goods?

Ever since the economic restart, some goods were in short supply. The list included both consumer goods and industrial goods in an extensive range of industries. For example, there was a severe shortage of hotel towels in October, and some of those are produced in Pakistan. And now, there are reports of cat food shortages in some areas of the country.

While many of the shortages have been alleviated, some have intensified. We see the headlines for computer chips and steel, but we know in the commercial equipment industry that these products and a host of others are in short supply. The supply chain is in a mess. I’m guessing manufacturing material, and component shortages are in the worst shape since WWII.

So, we can’t make enough products to satisfy demand. Combine this with consumer products sitting on ships for days waiting to dock and then being delayed a few weeks due to port congestion, and you end up with too few goods. The inventory numbers confirm this.

What? – Me worry?

Federal Reserve Chairman Jerome Powell has finally admitted that he expects some inflationary pressure as the economy reopens but expects it to be temporary. Previously, he said he is not concerned because inflation doesn’t “change on a dime” and that a return to standard 2% inflation rates is not a danger. He also thinks the FED will be able to control inflation once it starts rising.

In effect, he is saying they will be able to control the boulder once it begins to roll downhill, because the incline isn’t too steep.

What happens, however, if that hill is a bit steeper than they thought, and the boulder rolls right over the FED and anything else you put in its way. It’s like the old Chaka Chan and Rufus song: “Once you get started, oh it’s hard to stop”. Inflation isn’t something you want to see gaining speed. 

Big Difference of Opinion

There are those economists sounding the alarm based on the factors previously cited and the movement in the 10-year treasury yield curves. But Chairman Powell and other economists in the Biden administration say “Move along, nothing to see here”. Of course, they can’t both be right. So, as any decent businessman will tell you, hope for the best, but be prepared for the worst.