Inflation: Passing Fad Or Pending Crisis?
The economy is cruising full-sail into unprecedented waters, and there are storm clouds on the horizon. Unless you’ve had your head in the sand for the last few months, you’ve almost certainly heard people talking about inflation. And for a good reason. Prices are rising rapidly in many categories, and only time will tell if this is a transient cloud burst or the beginning of something much more severe.
Either way, your organization needs to be prepared. In this post, we’ll look at the factors contributing to inflation, what might be coming next, and what you should do about it.
So, what’s the back story?
In 2019, the U.S. economy was booming, and the ’08 financial crisis was finally becoming a distant memory. Then COVID happened. In a few short months, unemployment reached levels not seen since the great depression, and many businesses went under. It wasn’t good.
Desperate to prevent the sort of deflationary spiral that turned the crash of 1929 into the Great Depression of the 1930s, the Federal Reserve quickly slashed the federal funds rate to 0% and started buying $120 billion dollars in bonds every month. Not to be outdone, the rest of the government pitched in with trillions of dollars in stimulus checks, PPP business loans, and unemployment benefits, among other things.
Fast forward to the present. The threat of COVID is receding, and the economy is picking up steam. Consumers are emerging from lockdown flush with cash, but supply chains are not back to normal. Prices are rising fast. Inflation is currently at its highest level in 13 years, and at ~4%, it is double the target rate set by the Fed (per the PCE index).
Inflation could fade away over the coming months
Pretty much everyone agrees that inflation is happening right now. The question is, what is causing it and how long will it last? Many leaders, including Federal Reserve Chair Jerome Powell, believe that this is just a normal part of the short-term recovery process. During a press conference, Powell said:
“During this time of reopening, we are likely to see some upward pressure on prices… But those pressures are likely to be temporary as they are associated with the reopening process.”
Those who hold this view point to several transitory effects that will likely wane over the next several months. For example:
During the pandemic, consumers who kept their jobs and received stimulus checks saved a record amount of cash during 2020. They are now trying to spend that money, but supply chains are still out-of-whack. Per the law of supply and demand, lots of money chasing fewer goods leads to rising prices.
Also, because inflation is measured year over year, the numbers may look scarier than they are because some prices were depressed in 2020. Just remember those flights from Los Angeles to paradise for $50 exactly a year ago. With travel picking back up, they probably cost more like $250 now, which registers as inflation—same story with anything that involves crowds.
There are other arguments as well, and there is merit to all of these claims. But it is also interesting to note that while the Fed projected an inflation rate of 1.8% for 2021 a few months ago, they have revised their estimate to 3.4%. Many CFO’s and decision makers are getting nervous.
Inflation could be much a more serious problem
Economic predictions are a little like weather forecasts. Meteorologists look at historical trends and lots of data and make an educated guess. Sometimes (ok, a lot of times), they are dead wrong. Some respected experts think the idea that “inflation is transitory” is one of those bad forecasts. If they are correct, the implications could be serious. So, why do they fear this?
A fascinating report by Deutsche Bank summarizes this position:
“The coordinated monetary and fiscal response [to COVID] has practically no parallel in US history. This will only be exacerbated by further legislation for infrastructure spending currently moving through Congress. …
We worry that inflation will make a comeback. Few still remember how our societies and economies were threatened by high inflation 50 years ago. The most basic laws of economics, the ones that have stood the test of time over a millennium, have not been suspended. An explosive growth in debt financed largely by central banks is likely to lead to higher inflation. … Rising prices will touch everyone. The effects could be devastating, particularly for the most vulnerable in society.”
In case you’re wondering, this isn’t just an obscure opinion or Republican vs. Democrat thing. Former Treasury Secretary Lawrence Summers, who worked in both the Clinton and Obama administrations, echoed these sentiments when he said, “These are the least responsible fiscal macroeconomic policies we’ve had for the last 40 years.”
Basically, there is a chance that all that free money that hit your bank account from the IRS isn’t free. Go figure. If inflation continues to accelerate, a dramatic increase in interest rates may be necessary to correct the problem. This happened before in 1980 when the Fed raised rates to 20% to end double digit inflation that had been destabilizing the economy for several years. But rate hikes like that lead to recessions and a lot of pain for a world accustomed to cheap debt.
So, what is next?
Only time will tell, but we wouldn’t be surprised by something in the middle. In other words, inflation will likely be higher for the next several years (say 5%) than it has been for the last decade (around 2%). But if the government resists tightening policies and epic spending continues, things could get even more severe in the long run.
For retailers and CPG organizations, having an accurate understanding of prices across the competitive landscape will be critical for maintaining profitability. This requires access to large sets of pricing data and the processes to evaluate and respond rapidly to changes.
Some retailers are making progress in this area, but many others are falling behind. That is why RW3 helps organizations of all sizes access the data and insights they need. You don’t have to face these challenges alone. Time is of the essence, so let’s have a conversation about preparing your organization for whatever is coming next.
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