By John R. Stone
The inflation we are experiencing now is an interesting combination of a variety of things that have happened over the past three or four years.
It probably started with the tariffs that were placed on imported goods as long as four or five years ago. These hit certain industries harder than others. Manufacturers who used steel were hit the hardest. Most could not pass all of their increases along immediately but did so over several years, bumping prices up gradually as the years passed.
The coronavirus caused a few more things that started to boost the cost structure.
First there were lockdowns that upset parts of the supply chain. The lockdowns also affected the labor supply in non-essential industries. And they certainly affected the entertainment, service and travel industries. While the lockdowns were short in terms of the overall time frame, they were still very disruptive to the businesses and employees involved.
The virus created blips in the supply chains that affected manufacturing businesses that depend upon timely deliveries of manufacturing parts. That slowed production, which also slowed production in other businesses waiting for the machines or the parts others made for them. Slower production increases costs.
The virus also caused people to rethink work. Some chose to leave fields that required them to be in close contact with others. Many baby boomers close to retirement age anyway decided to hang it up sooner than they had previously planned. So employers found themselves short of workers and raised wages, the cost of which had to be recovered somehow and was in the increase of the goods sold.
And then there was the shipping mess. The orderly shipment of goods into the country was knocked out of whack by the pandemic. Some suppliers paid extra to get priority for their shipments. That drove shipping costs up for everyone and then ships jammed ports unable to handle such jumps in shipments.
Then you can add in the impact of the virus on energy sources. When the economy slowed down in the first half of 2020 and many people shifted to working at home the demand for gasoline plummeted. So producers reduced production; wells were shut down and people laid off. Some firms folded or were bought by others. That happened not only here in the United States but around the world as well.
Then things started to fire up again and production trailed demand. Oil is essentially priced by the world price and demand exceeded supply. Oil companies, which had been beat up by the drop in demand, decided not to ramp production up quickly because it could force lower prices. In addition, the companies had labor issues of their own and many of the laid off workers entered other professions.
And, if all of that wasn’t enough, we had the stimulus payments. Now they were designed to keep people spending, especially those laid off from work. And they worked out quite well, actually, and accomplished their goal. But was it too much?
Having lots of money can upset some normal consumer behaviors. Usually, if the price of something goes up, a number of people will start to look for alternatives or stop buying the product because of its cost. This helps slow the rate of increases.
But lots of people had extra money, and knew the purpose was to spend it to keep the economy going, so price discretion didn’t have its normal effect.
The big job now is to try to slow inflation before it damages the economy further. The Federal Reserve Bank usually controls that with interest rates and it had its hand in the mess by lowering interest rates during the pandemic to keep money flowing.
So a tightening of rates is in the works. We hope that and other actions by the Fed are as painless and effective as possible.