The science of economics can be daunting. Predictions about the economy can vary widely. Many economists begin their presentation with a statement and then “on the other hand….” I always wished we could have hired a one-handed economist!
Economics is all about scarcity. How we do choose with limited resources? And it becomes more daunting during inflationary spirals. Your dollar has less buying power.
What can cause inflation? An easy one to understand is supply and demand. If the demand is greater than the supply, prices will rise. Think of it like two people bidding on the same item. There is only one item. The cause can be on the supply side (not enough to go around) or on the demand side (remember the run on paper products at the beginning of the pandemic).
Look what is happening in the current housing market. Supply is limited, and demand has skyrocketed. In our industry, for whatever reasons, be it raw materials, production capabilities, or even transportation, these will impact supply and ultimately prices.
Another excellent example of both supply push and demand pull inflation is Uber. There are fewer drivers for a plethora of reasons. And many citizens gave up their cars and insurance during the pandemic. Now demand is much greater. You have probably noticed a huge jump in the rates, which are not published.
Unabated inflation can cause panic in the marketplace. Consumer confidence is impacted. Your buying power is less. And if prices rise faster than your investments or earning capacity, your lifestyle will suffer at some point. Assuming you are earning 3% with your investments, and if inflation is running at 5%, you have less tomorrow than you did today.
The Federal government tries to manage or contain inflation through monetary or fiscal policy. Those of us old enough to remember the last big scare was under Gerald Ford. His slogan was WIN – Whip Inflation Now. It did not work, but it was a boon to the promotional product industry for the many products employed to spread the message. But inflation is difficult to corral by arbitrary means. Just as water finds its own level, so does inflation.
We have to hope that the government understands the repercussions of its actions. There are always unintended consequences. Too much pressure can cause a recession, among other things.
Like everything else, keep a balance in your life, including your financial plans. Generate savings for that rainy day now as well as your retirement in the future. When that ugly avalanche heads your way, get out of its way. This too shall pass.
A 1975 graduate of the Wharton School at the University of Pennsylvania, Harvey enjoyed a 20+ year career in commercial banking, exercising his “golden parachute” in 1996. In his volunteer life, he is a past chair of the Small Business Banking Unit of the American Bankers Association, Easter Seal Society of New Jersey, the SAAGNY Foundation, PPAF EXPO, and Supplier Committee of PPAI. He is also a past President of PPAF. PPAI awarded him the H. Ted Olson Humanitarian Award in 2013.