November 26, 2021

The truth about inflation

Understanding economics is challenging. Most of us could learn a lot more about how the national economy works, and a good place to start is looking at the cause and effects of rising inflation. There’s a reason inflation is increasing world-wide, and it has little to do with politics, and nearly everything to do with the COVID pandemic.

The rate of inflation averaged around 2% from 2012 to 2020. That explains why Social Security checks barely increased year after year and the reason now, with inflation at more than 6%, there will be an increase beginning next year.

Higher inflation has returned with a vengeance – everywhere. Europe has an even higher rate than we do. Despite still worrisome rates of COVID infections, countries are opening up again and people want to be out and about. After more than a year of sacrifice, consumers are ready to start buying again. Unfortunately, the stuff they want to buy wasn’t being produced during the height of the pandemic while nearly everything was shut down. It’s going to take a while to gear up again. It’s now a matter of short supply and high demand, and the result then is higher inflation.

News reports are now focused on the high cost of living. As we experience the higher cost of the things we buy, the rising price of gas is always the most popular issue for the news media. It’s easy to interview someone at a gas pump unhappy with whomever is currently in the White House. It happens to every administration. It’s always the president’s fault when gas prices go up; but no one ever credits the president when gas prices inevitably go down again. To be really honest, presidents have little control over the price of gas.

In our world today, higher prices such as for fuel is often a global issue. Germany, the UK and the United States are all at a seven-year high for gas. The real cause? Both domestic and foreign oil companies are hauling in tremendous profits without increasing production, so right now, they’re in no hurry to solve the problem and there’s not much any president can do about it.

It was predicted that the COVID pandemic would do a number on our economy and it did, but you would never guess it caused inflation if you listen to the politicians. It’s amazing how quickly the political party out of power began blaming the party in power for everything. They complain about the weakness of the economy and criticize spending on social programs, but they never acknowledge shutting down the economy during the pandemic had anything to do with inflation.

Many economists are touting all the positives in the economy: Job growth is very strong. There are more jobs than people to fill them. Wages are up 5%. Profit margins are up. The Dow is up. Savings are up. But the economic system is terribly complex and there’s no way it could recover from a world-wide pandemic overnight.

Most economists predict inflation will subside in a few months. Still, we freak out when we can’t get the things we want on a timely basis (remember the toilet paper panic), and we worry our income won’t withstand this temporary blitz of higher prices.

There’s also a mindset that causes consumers to want to spend their money quickly when they’re worried prices will keep rising. We might be able to make better choices if we understand inflation will probably begin to calm down as the supply chain eases. We can react emotionally, fueled by the incessant drumbeat of partisan politics and the media, or we can be patient consumers, perhaps putting off purchases until the supply of goods recovers better.

We may intellectually accept facts as we try to adjust to the recovering economy but it doesn’t mean we’ll calm down until it begins to right itself. We worry, we complain, some of us even panic. It’s human nature, I guess.

The bottom line is to recognize recovery will require more work. We’re still fighting COVID. We’re still dealing with unvaccinated millions. There’s a massive glitch in the supply chain. Things will get better; it’s just going to take some time.