On the Up and Up?

Prices go up, prices go down. Why? Nobody knows.

Everyone understands the concept of inflation - we see rising gas prices on our daily commute, we listen to stories about how our parents bought their first house for a fraction of what we paid for ours, and every now and then we notice that our grocery bill has crept up a little. Inflation is rising prices - the inexorable march upwards of prices hitting our pocketbooks. As an economic indicator, measured by the BLS, it is meant to broadly capture the change in price of goods to the American consumer.

If you put all of these goods in a basket, you generally see that basket get more and more expensive every year.

At the same time that we see prices rising, though, we also see prices fall. Last year, we saw the price of oil plummet, and saw a somewhat correlated drop in the price of gas. Every year Apple announces a new iPhone that is better, faster, and stronger than last year, and the one we bought last year drops in price. Over the years, online shopping has constantly yielded newer, faster and cheaper shopping options.

Inflation can be sneaky. Sellers change the size of packages to charge the same price for less, but they also pack more features into our cars and technology and sell it at the same price. The cost of living tends to rise every year, but the quality of living often rises too. How to we measure that? The BLS adjusts the prices it sees in all different ways, and one of those ways is "hedonic adjustments" or adjustments that take into account the fact that we sometimes get more for the our dollar as products improve.

Click here to listen to this fantastic radio report on how inflation is measured.

So how does inflation affect us?

Since time and inflation affect different products in different ways, any individual will not see their budget grow in line with the published inflation number. Houses in my neighborhood that were priced at $120/sqft a year ago are $140/sqft today. The new laptop I bought for $1,500 six months ago is $1,100 on Amazon today. An EpiPen that was $400 six years ago is $700 today, though you can buy a generic version for $120 for a two pack. Gas prices are volatile and food can range from fine dining to off-brand ramen. None of this is readily obvious if I only told you that CPI was up 24% in the last 10 years.

What do all of these have in common?
Nothing... really.

Unexpected or high inflation is bad. If prices rise too quick, companies may not be able to keep up with expenses and consumers may have to cut their discretionary spending harshly.

Gentle inflation is generally encouraged in the economy, as rising prices encourage businesses to invest and consumers to innovate. Over time, a gentle rise in price and a corresponding rise in quality of life is good for the businesses selling the products and good for the consumers enjoying them. The Federal Reserve targets 2% inflation over time.

So what is going on right now?

In the news today, we hear there is high inflation. We have all seen prices rise for transportation, homes and meals out. We also hear that this is transient. Does this mean that we will get relief in our pocketbooks soon? No. The inflation is just the increase in prices. The prices may stop going up, but they don't have to come down.

Is this high inflation going to be a problem?

A lot of the current inflation is due to bottlenecks in the supply chain. Last year, factories shut down due to sick workers, mandated lockdowns or lack or raw materials. This meant that there were fewer products, namely building supplies, cars and electronics, to be sold. As the federal government stepped in to support it's citizens, demand rebounded quickly, outstripping supply. More money was competing for fewer goods, raising the prices sharply. Bottlenecks lead to more bottlenecks. 

Bottlenecks are not the only factor right now. Many raw materials and commodity prices are up. Wages and other labor costs appear to be rising. Even if other bottlenecks were freed up, these other expenses may continue to support higher prices.

Will prices keep going up forever? 

Federal government investments in infrastructure may help ease some of the bottlenecks. That should slow the rise in prices. A lot of the factors that are contributing to inflation right now do truly appear temporary. How long is this temporary? I don't know. Prices will continue to rise until supply can meet this pent up demand, or demand settles down to meet the given supply.