Inflation, Part 2

Inflation, Part 2

October 21, 2021

What is Inflation?

Inflation is the rising cost for goods and services. It measures the spending power of currency and often appears as a percentage. Rising costs hurt those confined to a fixed income since they have few options to generate more revenue to cover the rising costs. It also hurts those receiving a static paycheck as it takes an increasing amount of money to purchase the same goods and services year after year. Governments tend to like inflation because they can pay off past spending with cheaper dollars in the present and future. Inflation can be positive for certain assets classes such as real estate and commodities.

Is Inflation Here to Stay?

This year there has been quite a bit of talk about inflation and whether it’s transitory or has more staying power. A surge in inflation due to supply chain bottlenecks and other challenges related to the reopening of the economy have lasted longer than expected.

Our view is inflation may be here for a while. The degree and duration of inflation will be experienced more profoundly in certain areas of the economy than others, but in general, we are living in a more inflationary world than the last few decades.

Two kinds of inflations are washing ashore at the present time, supply inflation and demand inflation.

  • Supply inflation is more money chasing too few goods or services. The Federal government’s printing of trillions of dollars has to be absorbed by the economy. Run a Zillow on your home and you will see the effects of supply inflation. 
  • Demand inflation is people wanting more goods than the market can provide. The chip shortage has caused a car supply disruption and cars prices are in a steep climb. The breaking of supply lines has caused many companies to not be able to provide goods and up goes the price. A sheet of plywood before Covid was twenty-four dollars and reached seventy dollars at one point. 

We believe demand inflation will moderate over time as business responds to the need. Supply inflation is harder to predict and will likely last into 2022-2023.