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Stagflation: And so it Begins

Stagflation: And so it Begins

| May 12, 2021

After 13 years of planning for inflation for my clients, I finally feel vindicated. But I'm not patting myself on the back. I'm actually sad to be right. After printing money into a goldilocks environment, it seems inflation may be a thing.

"The rate of inflation over the past year jumped to 4.2% from 2.6% in the prior month — the highest level since 2008" according to U.S. inflation soars in April to 13-year high, CPI shows, and reveals fresh stress on the economy

However, this article states that this is because of the US opening up after an extended Covid 19 lockdown. While that's certainly a punctiliar one-off factor, solutions to the supply shortages are not likely immediate. For instance, you've heard of gas pipelines being hacked and creating a gas shortage. This lack of supply will create shortages at the pump. This morning my gas station ran out of gas. Interesting anecdote, but the real issue is the effect it has on prices. Prices MUST go up to incentivize production. But Congress will call it price gouging. That's my prediction. This extends a short term supply shortage into a long term economy crippler.

Furthermore, this will create a higher price at the grocery, department store and for online shopping. It takes fuel to get lettuce, socks and Sony PlayStations delivered to your door. It takes oil to make plastic. It takes plastic to type on this keyboard. I think you get my point. The issue is that prices must go up to incentivize supply. And it will, no matter how much complaining we do.

To lower inflation, the Federal Reserve will raise interest rates, eventually. They never get it perfectly right. They're too slow at first and too aggressive in the end, leading to a well-deserved recession. What will rising interest rates and a rising cost of lumber do to real estate. One will decrease demand and one will increase cost. This is a recipe for stagflation. A stagnant economy that experiences rising prices.

If you weren't an investor or consumer in the 1970's, you're about to get a second chance.

One more issue to keep an eye on: wage inflation. If you can stay home and collect a check from the government, what incentive is there to get a low paying job. Nationally, job openings are soaring. Source

Why is that? After being out of work for months, shouldn't people be clamoring for work? Nationally it's a trend, anecdotally it's a train wreck. Business owners can't get lumber to build houses or a receptionist to take phone calls. He has to pay more for lumber and he has to pay more for labor. That cost gets passed on to customers who experience stagflation.

Concerned? You should be. Book a call for a financial therapy session, click here.