We talk about inflation a lot but do we truly understand what it means? Let’s start with a dictionary definition:


A persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.


The last eight words are where the pain lies. “Resulting in the loss of value of currency”, that’s OUR currency that we use to buy products and services.


In October of 2021, over 2 billion products were out of stock online in 18 different product categories. That number is 33% higher than the same month previous year, but over 325% higher than 2019.


How Our Grandfathers Managed Inflation

People before us have dealt with inflation. It has not been much of an issue for over a generation, so many people in today’s business world have not had the opportunity to experience it or deal with it’s effects.


From 1973 until 1981 the US inflation rate was about 9%. The President even initiated Wage & Price controls to try to tackle it. The primary driver then was an Oil Embargo that the Middle Eastern countries used to drive up the price of their primary resource.


How is today different? Many additional factors are in play to drive inflation to its current level of 6.9% and likely higher. What is different?


The products driving the Consumer Price Index (CPI) (energy, shelter, food, vehicles) are not luxury items, these are impacting everyone in the economy including B2B.  If there is no Oil Embargo, what is driving the inflation?


Losing Momentum with COVID-19

The COVID-19 pandemic slowed down the economy. People had little to do. The fortunate could still work from home and they could buy things with their remote work paychecks. Others collected unemployment benefits. Surprisingly, during the pandemic lockdown, our bank accounts improved because there was less economic activity and less demand for what we make.


While the nation was in lockdown, there was little travel to consume oil. The rental car companies had no need for their inventories, so they sold most of them off to used car dealers.  We were already making our leases longer, so people paid them down while they sat in the garage or driveway. But our aging fleet needs to be renewed even if it is from age instead of use.


These changes meant the economy lost momentum. It is very difficult to rent a car today for those choosing to fly again, making us willing to pay more. And while factories slowed down production, the scarcity of the remaining products caused prices to go up as well. People are paying more to buy the same things, so that is inflation.


Higher Wages Driving Up Costs

A typical car has about 30,000 parts. Our West Coast has freighters waiting out at sea to dock and unload all sorts of automotive parts, and other items we desire.  Some of those freighters are waiting 90 days at a cost of $1,000,000/day. What is the hold up?


Partly, it is a severe labor shortage. Our labor force participation rate is down approximately 1.7% from pre-Pandemic levels.  We still need those workers, so companies are forced to offer higher wages to incentivize workers to return, change or move up.  So even if the freighters make it to port, there is still a chip shortage for autos, and there are not enough dock workers and not enough truckers to haul the goods away.


When companies have to pay more for labor, sadly, they typically pass those increased costs on to their customers, resulting in inflation.

 

The Great Resignation Creating More Costs

In October 2021, 4.2 million people quit their jobs, almost 2.8% of the workforce. The US Job Market has 5,000,000 more openings than people seeking employment. Nearly 11,000,000 actual positions unfilled which is near the record. Those increased wages lead to more inflation.


A Look Ahead

When your grandfather faced inflation, the Fed would raise rates to “cool off” the economy.  This worked well when the Oil Embargo was driving the rising prices. Today, the raising of the rates which causes money to cost more for houses, automobiles and credit cards would not significantly impact the supply chain disruption or government spending (which is at an all time high).


The inflationary world average is currently 4.3% with the US over 60% higher at 6.9%.  We are not experiencing the hyper inflation of Venezuela (1,946%) or Lebanon (144%) or Argentina at 52%.  However, we have not seen the end of inflation for this generation.

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