Inflation Now and In the Near Future

Welcome to my two-days-late 3^rd Tuesday look at the economy.  October is once again a month of suppliers sorting out their post-pandemic ramp-up issues.  The good news is some bottlenecks are showing signs of balancing Supply & Demand (S&D) and thus gaining some price stability.  Others appear to be on their way to equalizing.  The bad news is the shortage of supply of oil on the market.  As demand heats up, there is not enough supply of oil on the market to keep prices from escalating.  And escalate they have!  The worst news involves the fact that petrol derivative products are in every stage of production, so the increase compounds itself.  This is happening in what I call the real economy, where markets determine price.  Regrettably, the real economy does not exist in a vacuum.

Not since the 1970s has the US been these impacted by petrolInflation.  Back then the government didn’t know how to fix the lack of oil available to us under the Arab Oil Embargo.  At that time, OPEC was truly in charge of oil supply, and thus prices, around the world.  We are seeing much the same thing now.  OPEC+ can once again control world oil prices and is exercising the discipline to stick to their quotas for production.  Limiting the supply when demand from world economies is growing and you must have price increases.  In the recent past, the US, through its output level, could influence world oil prices.  Recent changes in political views, however, eliminate this swing producer power and we are, like we were then, beholden to OPEC+ once again.  (NOTE:  It did not go so well in the later ’70s!!)

So current inflation has two primary causes: 1) Not filling demand along the supply chain and 2) PetrolInflation. 

The government is pouring money into the economy to stimulate demand (?) and create jobs.  That highlights the other big problem with this recovery, employers cannot find enough qualified (or not in some cases) employees to fill available jobs.  As the government starts spending the next big program riches (signed on Monday), demand for everything will go up, but demand for labor that we currently can’t find will increase as well.  The wage inflation inherent in this scenario will be the primer cause of tomorrow’s inflation.  We must not ignore the additional pressure this demand by fiat is going to place on our already struggling supply chain.

Something wicked our way comes.  If we add in the Fed’s actions to stimulate the economy to the above-highlighted issues, and you see no comfortable solution.  The other scary thought: Actions the Fed and Congress take do not really show up in monthly statistics for three to 12 months.  2022 will be an interesting time.