Understanding the Coming Inflation Problem

inflation

2020 was a tumultuous year for both the global and the US economy, and that tumult left many investors and consumers hoping for better, smoother days ahead. Now that we’re well into 2021 both temporally and financially, it would seem that things are improving. Jobless claims are down, job creation is up, the markets are recovering and a housing construction boom is underway. While those would all seem to be positive indications of recovery, there’s an elephant in the room that needs to be discussed. Inflation is always a concern and under the current circumstances a serious one. To be direct: there’s an inflation problem underway in the US. Let’s talk about what caused it, what it means for you, and what you might do in response.

What Form Will Inflation Take?

There’s considerable debate in financial and policy circles about whether or not what we’re seeing is true inflation or just a response to the unique circumstances in which we find ourselves. Key indicators like the Consumer Price Index fell dramatically between March and June 2020, in response to COVID restrictions and lockdowns. They rallied in June and July of that year as those restrictions were lifted and the rally continues–although we must note that the CPI remains well below its 3-year average at the time of this writing.

Increased consumer demand is pushing the current rise in the CPI, as businesses reopen and more people re-engage with the economy. Increased demand will have a number of potential effects, which we’ll discuss a bit later.

What Role Do the Bailouts Play?

President Biden recently signed a $1.9 trillion COVID relief package, which is intended in part to drive economic growth. While several measures within the package may do just that, the primary concern as far as inflation goes is the role that more money chasing the same amount of goods will play in shaping consumer prices. It’s the basics of economics, in that it goes back to the fundamentals of supply and demand. Coupled with the current kinks in the global supply chain, and we’re looking at months of higher demand coupled with restricted supply.

What Does it All Mean for Consumers?

To be blunt, the net result is that consumer prices on some goods are going to rise, at least for a while. Whether or not this is true inflation–a change in the value of the currency vs the value of desired goods–is an ongoing and open question. However, the fact remains that consumer prices on consumables like food, lumber, consumer electronics, and automobiles are going to rise in the short term. This should level out over the rest of the year, due to rapidly evolving consumer habits and a slowly stabilizing marketplace. But in the short term, some key goods will be more expensive.

What Can Investors Do?

The best approach right now is to remain cool and collected. A calm mind and careful planning will see most investors through this far better than rapid-fire and rash decision making. Consulting with a financial advisor who knows the field and is adept at long-term planning is a must right now. They can help you illuminate the blind spots in the months ahead and use this time as an opportunity to move closer to your goals.