Finquisitiv
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Finquisitiv

When Inflation in May 2021 reminds of the 1980s, it is Breaking News.

Professional inflation-watchers are on close watch for signs that the current forces might be unleashing a form of thinking about price dynamics unseen since the early 1980s, when prices rose in part because everyone expected them to.

As you see, inflation has risen to the top of the economic and financial news in the last weeks due to many factors that we will detail below. But first, let us define what is inflation.

Inflation is a general increase in the prices of goods and services and a fall in the purchasing value of money. This means that whatever money you have becomes NOT enough to buy the things it could buy before. So, your standard of living declines and your financial plans derail.

You must know that important shocks are happening to the economy as it is jumpstarting its rusty engine after a long halt. Demand for all sorts of goods and services has surged but their supply is coming back slower. This resulted in shortages and price increases across many sectors, particularly homes and cars, which represent large ticket items in the price index formula calculation.

With an economy in a reboot mode, this situation might be temporary. Yet, the longer these price surges continue the more the spill over to other sectors will likely occur, due to market psychology and behavioral economics. Hence, inflation could shift in ways that become self-sustaining.

To understand the combination of factors at play in this interesting junction of history, we ought to mention that the price of used cars and trucks rose 10 percent in April 2021, pushing the Consumer Price Index to its steepest year-over-year jump in 13 years. This has several causes including rental car companies reducing their fleets during the pandemic and not selling used cars that they usually unload. Fewer new cars were bought through the stay-at-home policy period, resulting in fewer trade-ins, and now new car sales are being held back by a shortage of microchips.

In addition to the above factors that do not stem from government policies, the $2,000 stimulus check most Americans received in 2021 and the generous unemployment benefits and low interest rate policies from the Fed have made cash abundant in the hands of consumers. If the Fed raised interest rates or that Congress increased taxes to claw back stimulus money, it will not fix the used car supply market but might lead suppliers to hold back on investing in new capacity for fear demand would fall in the future. The used-car market may start to stabilize late this year, but the problems are unlikely to be fully worked out until 2022, said Jessica Caldwell, an auto industry analyst with Edmunds.

The air travel is another industry that was extraordinarily hit by the pandemics, the airfares are now returning to pre-pandemic levels, which shows up in inflation data as a price increase. Others, like lumber prices, reflect high demand along with supply that is fixed in the short run. Then, the spike in East Coast gasoline prices after a cyberattack shut down a major pipeline, are random events that exacerbated the price index increase but tell us nothing about the future inflation.

The Fed is betting that even if several months of surging prices happen, it will be at worst a one-time adjustment, and potentially something that reverses. “If past experience is any guide, production will rise to meet the level of demand before too long,” the Fed governor Lael Brainard said this week. “A limited period of pandemic-related price increases is unlikely to durably change inflation dynamics.”

To sum it up, the economy is growing fast, and the capital markets are nervous about inflation…… but what about your money in the midst of it all?

What does inflation mean for you, and what should you do about it?

First become informed about the forces affecting inflation and prices. Second, save more and invest more during these times of nervousness of the market. These moments create market pull backs and price drops that enable you to invest at discount values not possible in the normal times. Third, reexamine your budget and do without items that could wait until later especially if their price went up recently. Fourth, think about your budget from a long-term perspective, make sacrifices on immediate buys now and invest because your future self will thank you for it.

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khadija khartit

I care about the future of societies, the future of work, the future of money, the future of women in societies, the future of inclusion.