Inflation Story

Yes, there is a story here. Some of what we read in the press and watch on newscasts is just that, a story, a piece to grab attention and ratings. Not much else is true. Here is a better scoop to ponder.

Inflation is defined as rising prices for the same set of goods, quality and number. You pay more without getting more. Deflation is the opposite when prices drop for the same quality and number of goods that before you paid a higher price. We rarely experience true deflation although we did in 2020 and 2021. The pandemic was the primary cause.

During the pandemic, the demand for goods in many categories simply dropped out of sight. Commuting was eliminated in many forms. Any business or supplier who served commuters had leftover inventory and little demand for it. Same with wholesalers. For a time these goods were widely available to consumers at reduced price levels.

In other categories, however, needed goods were no longer available in large quantities to meet demand, so these goods became scarce. Prices rose to reflect this imbalance in supply and demand. Just like the textbooks taught us.

The pandemic caused huge dislocations in markets with imbalanced supply and demand. Prices spiked or fell accordingly. With the pandemic easing, markets are getting back to a more normal cycle. Still, normal is being redefined continually until a purer form of balance returns to supply and demand of goods and services.

Recall toilet paper shortages? We had plenty of toilet paper, but not in the same useable format once commuting ended. Office buildings use less toilet paper rolls and more toilet paper sheets for dispensers. That supply remains enormous while paper rolls are back to a balanced position. Toilet paper rolls are used in households and panic buying and hoarding is mostly over.

The pandemic upset the supply chain in many industries and for many products. Automotive manufacturing needs supplies that meet manufacturing schedules as the product is being built. Just-in-time supply chains have become the norm over the past few decades. Now however, the supply chain is erratically interrupted. The largest problem we have heard much about is supply of computer chips that are vital to modern automobiles. Without them, completed cars and trucks sit idle in inventory lots at the point of manufacture waiting for chips to be made and shipped and installed.

Shipping channels the world over are bunched up and stalled. This is true for ships, trains and trucks. What is wanted or needed is not where it will be of most use. This makes the final product scarce. Prices rise as a result. Then too, used vehicles are substituted for new when reliability and high odometer readings cause people to seek younger vehicle stock. This has caused a large spike in prices for used cars and trucks. Once new vehicles resume their normal supply traffic, used car prices will drop as will new cars unless catching up with demand for new continues scarcity in that sector of the market.

During the pandemic, housing supplies changed greatly. Homes better suited to work-from-home routines were in demand; locations were of less concern because where one lived didn’t much matter if you could support the family from a home office. Far flung suburbs became practical overnight. Such homes are less costly. This caused a drop in prices for homes in urban areas and close in suburbs.

Some housing markets experienced shortages of home listings as residents chose to stay with their current homes and improve them. A shortage of homes on the market created an imbalance and prices responded with hikes.

Supply chain problems created all sorts of other market imbalances. Gasoline and oil markets slumped in the beginning of the pandemic, but now prices are climbing to reflect more demand. Some workers have returned to commuting while others are getting out more and driving to local destinations or just taking a Sunday ride in the country.

All these market dislocations have caused price instability. This is not the result of a managed economy run amok. This has nothing to do with politics, either. There is no blame to place on anyone for price variability. And the executive branch of the federal government has little or no role to play to repair the current situation. Normal rules of market supply and demand apply.

We are left with ‘grin and bear it.’ Learn to discern who is saying whatever about a situation. They have an axe to grind. Pay attention to the details of the real world and tune out the manipulators in our midst.

Then ride along with the market. Things will improve when stable markets return to day to day norms.

November 18, 2021

 

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