5 Reasons Why Inflation will Lead to Stagflation

Are you shocked every time you go to the store and buy groceries and see how the price of essential items keeps going up week after week? If inflation makes you nervous, you are not alone.

According to the U.S. Bureau of Labor Statistics

"In April, the Consumer Price Index for All Urban Consumers rose 0.8 percent on a seasonally adjusted basis; rising 4.2 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.9 percent in April (S.A.); up 3.0 percent over the year (N.S.A.)." 

What is the C.P.I.?

The Consumer Price Index (C.P.I.) is a measure of the average change over time in the prices paid by urban consumers for a representative basket of consumer goods and services. Calculating inflation rate is based on the experience of consumers in their day-to-day living expenses. Indexes are available for the United States and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. 

There is a limited supply of goods from construction building costs to microchips. As governments worldwide have infused their economies with cash stimulus, it has created a situation in which more money is chasing fewer items. We have a problem where workers are even in short supply. Some people are making more money staying home collecting unemployment than going back to work. People are spending less over the pandemic, having more pent-up demand and cash to spend now. Thus assets appreciate, be it stocks or groceries, or automobile purchases.  

Why is there a disconnect between the U.S. Bureau of Labor Statistics and what we see when we go to the store? Take lumber, for example, construction has been in high demand, and lumber alone has gone from $344 in May 2020 for 1000 board feet to last week it was at $1,300 and as high earlier in May 2021 of over $1,600 earlier in 2021 according to tradingeconomics.com. 

That is up by more than 300%, not 4%; for reference, if it were 4%, lumber cost should be closer to $360.00. A year ago, crude oil was less than $40 a barrel, and more recently, it is closing in on $70 a barrel, according to trandingeconomic.com. Again, that is not 4% but 75%. According to Redfin.com, our local housing inventory has increased in value by over 35.4%.

You can also calculate how the dollar's buying power has changed throughout the years with an inflation calculator.

Inflation is here, and there is a good chance it is not going away any time soon. I have heard reports calling it "transitional" inflation, whereby supply and demand are temporary because of the economic slowdown due to the pandemic.

All this cash infused in our economy is a loan that the government took out using its citizens as collateral. Guess what? We need to pay it back, and one way to make paying it back more manageable is through inflation.

In the late 1970s and early 1980s, inflation got out of control, and we had a situation of "stagflation,” which means high inflation with low employment.  I remember that day in school they had a "W.I.N." campaign, which stood for Whip Inflation Now.  

Could That Happen Again? 

As a Spokane financial advisor for over 25 years, I have seen history repeat itself. Here are a few reasons why it's highly possible, even though many leaders don't think it will:

1. During the pandemic, people who exited the workforce may not be returning due to health fears, unplanned/early retirement, or households that chose to have one parent exit the workforce to manage remote learning and sticking with this new division in household labor. Too many people choose not to work and financially seem to be figuring it out through other income sources by the government.
2. Businesses are learning ways to be more efficient with the workers they have and may not choose to employ human workers in the future.
3. Robots are here, and we will see more and more taking jobs, for example, driverless vehicles in delivery services.  
4. FOMO, especially in real estate. Millennials are bidding up buying real estate with artificially low-interest loans and locking driving housing prices up all across the country. There are more millennials than there are boomers.
5. Taxes—no one will avoid getting hit with paying more. Whether through income taxes, sales taxes, or property taxes, all of those go up with asset appreciation.  
6. Businesses will transfer higher tax expenses to consumers, and once again, prices will go up.

Conclusion

Whether 4%, 6%, or revisiting the highs of the last 1970s, one thing seems inevitable, asset appreciation is here, and get ready; it is going to be one heck of a ride, whether transitional or here to stay.

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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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