Is Inflation Dropping?

Inflation

So, we are told inflation is dropping. We are told that the economy is slowing, and prices are surely going to stop rising as much as they have in recent years. If that's the case, why does it feel like inflation is so high now?

Inflation is a function of demand. If there is more demand for goods and services, prices go up. What we are seeing now is the result of a snapback economy from the downturn the economy experienced during Covid. If you recall, over $1 trillion was inserted into the economy by the Federal government to keep the economy away from a depression. 

Bottom line inflation needs to be lower. With tax cuts coming as well as tariffs, the outlook for inflation relief appears as it may be wishful thinking. It's entirely possible that inflation throughout all sectors of the economy will continue at high rates and possibly increase if the stimulus actions proposed are implemented.

We are investing on the assumption that while inflation may slow, CPI and PPI reported numbers will likely be stubbornly high. Relief is not imminent. 

Why Higher?

Inflation is currently high due to a combination of factors, many of which have been building up over the past few years. Here are some key reasons:

1. Pandemic Disruptions: The COVID-19 pandemic caused severe disruptions to global supply chains, which led to shortages in goods and delays in production. As economies reopened, demand surged while supply struggled to catch up, pushing prices higher.
2. Supply Chain Issues: Ongoing supply chain problems, exacerbated by factors like labor shortages, transportation bottlenecks, and geopolitical tensions (e.g., the war in Ukraine), have led to shortages of key goods and materials. This drives up costs, which businesses pass on to consumers.
3. Energy Prices: Energy prices, particularly for oil and natural gas, have seen significant increases due to factors like geopolitical instability (e.g., Russia’s invasion of Ukraine), production cuts by OPEC, and tight supply in global markets. Higher energy costs affect almost all sectors of the economy, contributing to widespread price hikes.
4. Labor Market Tightness: Many countries, including the U.S., are experiencing labor shortages in key sectors, leading to higher wages. While this benefits workers, it also raises production costs for businesses, which often result in higher prices for consumers.
5. Monetary Policy: Central banks, particularly the Federal Reserve in the U.S., have kept interest rates low and engaged in extensive money printing (quantitative easing) to support economies during the pandemic. While this helped stimulate growth, it also increased the money supply, which can contribute to inflation if demand outpaces supply.
6. Demand Surges: After the initial pandemic lockdowns, consumer demand rebounded strongly as people resumed spending. The combination of pent-up demand and government stimulus programs boosted purchasing power, further fueling price increases.
7. Global Economic Factors: Inflation is not confined to any one country—many major economies are experiencing high inflation simultaneously. This creates global price pressures, particularly for commodities and goods that are traded internationally.

These factors combined create an environment where prices are rising across a wide range of sectors, from food and housing to services and energy. Central banks are responding by raising interest rates to try and bring inflation down, but these measures can take time to have a full effect.