Commodity traders have the right prescription for curing inflation: “The best cure for inflation is high prices”.  During this period of full (overfull?) employment and record inflation, will this same truism play out in the general economy as well?  If so, when will it start working?

To figure out if it will hold true, let’s look at the backbone of our economy, the consumer.  Everyone first takes care of life’s needs (think: food, shelter, clothing), then with remaining income, consumers buy based on wants (think: bigger, better, less useful).  The consumer is as emotional as they are calculating.  One emotion deeply influencing buying decisions is confidence in one’s future.  Feeling secure in your job, with your family and, looking down the road, you see more of the same, are elements of that feeling of confidence.

Going into the pandemic, the economy was already near full employment, rates were low, and things seemed utopian.  The pandemic and ensuing lockdown blew everyone’s socks off!  We all worked feverishly to adapt our work and home lives to work with what we had available.  

Government assistance programs worked great, in the beginning.  People and businesses received ‘free money’ from these programs.  Between fiscal and monetary actions, over $8 trillion was injected into an economy that, due to lockdowns, could not even reopen for business.

During the first year of lockdown, the economy’s ‘foundation production’ all but stopped.  As the economy opened up in year two, the consumer was flush with cash, back to work and sick of being locked down for a year.  With their needs covered, they are allocating more money to their wants and are ramping up shopping to get them.

Year two brings continued opening of the economy and consumers buying– a lot.  And that’s where our current bout of inflation starts.  The ‘foundation production’ (think: steel, plastics, chemicals) makes the raw materials for final goods production was closed for a year!  As consumers buy, goods production is short of replenishing supplies.  Prices are rising because of the short supplies.

Add to this the fact excess fiscal spending and the Fed’s market activities supplied more money in two years than we could use.  The ‘foundation production’ is still not up to full efficiency, throttling goods production for a lack of parts. The result is empty shelves.  

Consumers, facing higher prices for needs, are sacrificing spending on wants.  As production increases, want and needs prices will fall and consumers will begin re-allocating money to wants.

Inflation is too much money chasing too few goods, driving up prices until consumers stop buying.  That is where we are now.  Consumers sacrificing want purchases for need purchases out of necessity is slowing demand.

Prices are rising due to supply limits.  As supply increases, prices will fall.  Then consumers will buy again.  And that’s how high prices cure inflation.