How Long Will High Inflation Last? When economic hysteria strikes, I always recommend approaching it rationally and pragmatically. Only a fraction of the noise and confusion has centered on whether inflationary rates (6.8% y/y) we are witnessing are temporary or are here to stay for an extended period. I belong to “Team Transitory”. Since April 2020, most of us have seen our lives unfold according to demand-side data: an unprecedented surge in goods demand as more people spend time working from home, exercising at home and playing at home; coupled with a decline in service demand due to people not going out as frequently; higher goods demand has caused supply chain bottlenecks as more money chases fewer goods; this phenomenon is not limited to one country but is seen across the board globally.
Here are the goods vs services expenditure figures in the U.S. that demonstrate how demand for goods has drastically increased while services spending is still significantly below where it was prior to pandemic pandemic:
Separate from supply chain bottleneck issues, OPEC and other oil producing cartels have coordinated cuts in their oil production, leading to higher gasoline and diesel prices as well as cost of goods increases across the entire economy. Meanwhile, in the U.S. we’ve been witnessing signs of a housing bubble as foreign and domestic investors flood our housing market with first-time home buyers, driving prices for limited housing units up.
Why am I on Team Transitory? Supply chain disruptions seem very demand versus supply in Econ 101 terms, and I believe industry will figure it out sooner rather than later. Shipping container inventory levels have begun declining gradually as evidence that this theory may hold. Oil prices need a cartel defector who’ll allow some relief into their market eventually; housing could cool off if Fed raise historically low interest rates like they’ve hinted will happen starting 2022 to help curb inflation;
That statement represents educated guesses informed by history, data, and the opinions of economists I respect; but it’s impossible for any one of us to know for certain what will occur here; no matter their prior prognostication track record. Micro and macroeconomic conditions are highly unpredictable and change quickly even in relatively calm economic periods – this being one such period with frequent pandemic disruptions causing sudden economic shockwaves; therefore high inflation periods could last far longer than anyone anticipates.
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