Not Inflation Again
It’s Monday, it’s about inflation, again.
Well, sort of. Let me get this out of the way. I know this seems to be a constant theme and surely, there are other things to write about but at this point in my life, I am more about making sure everyone knows I was right about inflation. With that being said, I will make this bold prediction: Inflation will be at 4 1/2-5% for the next six months at least. We will see some months when the CPI numbers will be above those levels and we will see months where they will be below but make no mistake, we will be in that semi-inflationary period for a while.
The other prediction I will make is that the Fed will do nothing at first but by November, rates will creep up. Not the worst thing in the World but surely not the best.
Why will the Fed act (or react) with such caution? It seems to me that Fed Chairman Powell is a wait and see kind of guy and because the Fed relies on government inflation numbers and not real World pricing, it won’t see true inflation for a long time if ever.
While the Fed is a separate entity, not bound by political pressures, it is still an agency within the government and therefore has no ability to act outside of the box the government is always in. They follow the data and the data is provided by other government agencies which again, are inside a prescribed box. The insistence that they do look at other key factors when making decisions may be true to a point but the reality is, they are part of a lumbering bureaucracy that has a tremendous amount of influence but very little creativity. To look at housing numbers, real, not government supplied, or to look at supermarket prices instead of Bureau of Labor Statistics numbers, they would see that inflation is significantly higher than reported. Seeing the actual, on the ground, numbers might change the speed at which they react.
Even though I think we are in a ramped up inflationary period, I don’t think it is necessarily a bad thing. Wages will rise accordingly and things will eventually balance out without Fed intervention. The Fed should only react when it becomes a spiral and then put the hammer down.
In normal inflationary times, pricing pressure is led by wage demands. Thats Economics 101. This is different. This is an economy that was flying and then it wasn’t. It wants to fly again but not all the components want to fly with it. This dismemberment will eventually get back together but for now you have discombobulation. Some in the workforce want to work, some don’t. Some supplies are plentiful, some are not. This is the most haphazard recovery I have ever seen and and that haphazardness is the root cause of the inflationary pressure we are seeing.
As I have stated before, I am not a big conspiracy theorist but I do think there is something a little more sinister going on and I will explain.
Manufacturers have been complaining about supply chain disruptions. Components for their manufacturing are in short supply. Be it chips or any number of commodities used in manufacturing seem to be lost in space. Well they are lost in space until the price rises and then all of a sudden there is no longer a shortage. Hmmm. Toilet paper, paper towels, lumber, etc. Price goes up. the shelves are miraculously restocked.
The other blame is this labor shortage. Thats another one that doesn’t make complete sense. You are a manufacturer, you pay someone $15 an hour with limited benefits. You can’t seem to get them back to work because they are making $600 a week staying home. Ok. I can see that somewhat. I still believe most people would rather be working and being a valuable part of society rather than a drain on society. Maybe I am still too naive’. However, most manufacturing jobs pay more than that and if you are union, even better. Another important fact and manufacturers should exploit this, the government largess will be ending in September and then what? I just don’t think mid-size to large scale manufacturers are having problems filling jobs. Skilled workers are working. Union jobs are all filled. Wages may rise a bit but these companies can afford to increase wages and you know as well as I do, they will pass those labor costs on to the consumer.
It’s the true low wage industries that are having a hard time attracting employees back. The businesses that can least afford getting into competition for labor are the one suffering the most and will continue to do so. Restaurants, hotels, theaters and the like are struggling to fill the hundreds of thousands of positions that are open and they have razor thin margins to begin with. Increased labor costs will crush many small businesses as we move through the summer. One possibility is that these businesses can pass along increased labor costs and hopefully with this rebounding, booming economy, customers will eat the increases along with the burgers.
Again, prices will be rising as we rebalance and you would think that prices would adjust along with that but they won’t. Companies rarely lower prices and given the opportunity, will raise prices and keep them there until some competitive element forces them to rethink their pricing strategy. Right now, everyone is raising prices and they will see where it goes. Yet, inflation is not a problem and not sustainable. Maybe Jerome Powell should read my Substack.