President Gerald Ford labeled inflation “public enemy number one” when it climbed to 20 percent during the seventies.
It raised havoc on family budgets and crippled businesses. Grocery prices skyrocketed. Consumer goods were in short supply. So was gasoline, which lead to high prices.
Humm. Any of that sound familiar?
Today, reopening the economy, an oil shortage, and supply chain problems have pushed the Consumer Price Index (CPI) above five percent. Officially, that means we are experiencing inflation. So, it seems like a good time to look at inflation and what you can do to fight it.
What Is Inflation
Inflation is the increase in consumer prices to the point that it decreases buying power.
In other words, if prices go up and wages stay the same — we have inflation.
Reasons For Today’s Inflation
Three components fuel today’s inflation:
- Supply chain problems: Stores are not getting products to sell on a consistent basis. Likewise, manufacturers are not getting materials.
- Increased consumer demand: Household spending was constricted during the pandemic. However, it has increased with the spread of vaccines and the opening of the economy.
- Oil supply restrictions: Both OPEC + and U. S. oil producers have held back production leading to a reduced supply as demand rises.
Why Inflation Matters
As shown above, inflation can increase your cost of living by making food, utilities, gas, clothes, and other good and services more expensive.
In addition, inflation can impact the growth of a nation’s or the world’s economy. Too much inflation can reduce incomes to investors. It can also raise the cost of borrowing.
The reduction of investments and raising of borrowing costs make it harder for new businesses to launch and existing businesses to grow.
A Little Inflation Is Good
It is unrealistic and unhealthy for prices to remain static.
“Most economists now believe that low, stable, and—most important—predictable inflation is good for an economy,” according to the International Monetary Fund (IMF).
As a result, central banks, such as the Federal Reserve, have tried to target inflation to keep interest rates and prices manageable.
The Consumer Price Index is the primary gauge of inflation. It rose 5.4 percent year-over-year in September, according to the U.S. Bureau of Labor Statistics.
A deeper dive into core inflation indicates some prices may be leveling. Core inflation is consumer prices, minus fuel and food. In September core inflation, rose 4 percent. That is the same as August.
“We’re seeing the unwinding of a lot of factors that pushed inflation prints higher early in the summer,” Guy Lebas, Janney Capital Management, told The New York Times. “We’ll see these rolling supply and demand imbalances gradually diminish into 2022.”
Jerome Powell, Chair of the Federal Reserve, told a virtual meeting of central bankers last week that supply problems are prolonging inflation.
“It’s frustrating to see the supply chain problems not getting better, in fact, they are probably getting worse,” Powell said. “It’s very difficult to say how big the effects will be in the meantime and how long they will last.”
Powell and the Fed have maintained that high inflation will not last long. In fact, Powell sees inflation at about 2 percent next year.
“The rapid reopening of the economy has brought a sharp run-up in inflation,” Powell said in a late August speech. He added, “the baseline outlook is for continued progress toward maximum employment, with inflation returning to levels consistent with our goal of inflation averaging 2 percent over time.”
Inflation is in part a matter of attitude.
Sure, you say, my attitude did not cause OPEC+ to restrict oil production. Naturally, you are right. However, if consumers and producers build an inflation expectation into salary negotiations and prices, the result can be inflation.
“If people or firms anticipate higher prices, they build these expectations into wage negotiations and contractual price adjustments (such as automatic rent increases),” according to the IMF. “This behavior partly determines the next period’s inflation; once the contracts are exercised and wages or prices rise as agreed, expectations become self-fulfilling.”
How To Fight Inflation
It would help reduce inflation if you can clear up supply bottlenecks and increase oil production. Can’t do that? Me neither. However, there are measures we can all take to reduce the impact of inflation in our daily lives.
Inflation will eventually ease and prices will drop. So, part of beating inflation is to wait to make purchases.
If you do not need it now, wait. You will save money by buying at a later date when prices have dropped.
Most salespeople and their employers would rather lose a little profit than lose a sale altogether.
Develop the mindset that everything is negotiable. You might get a lower price just by asking.
In some cases, you might not get a lower price. However, you might get a bonus. For example, a car dealer might not drop the price of a new model but might offer free oil changes for a year.
List all your monthly bills. Contact each company associated with those bills and ask for a lower rate.
Insurance companies, cable companies, cell phone companies, and credit card companies have rates and fees that may be negotiated.
If you ask, you might get a lower rate. You have nothing to lose.
You’ve heard it before. Do not shop when you are hungry. Make a budget and stick to it.
Look for sales and stock up.
Switch to cheaper generic brands.
Shop discount stores, such as Costco and Sam’s Club.
Eat vegetarian meals now and then. Fruit and vegetable prices have hardly risen.
Strip bicycle and roof racks off your car. These accessories cause increased wind resistance. That hampers fuel efficiency.
Drive consistently. Maintaining the same speed helps gas mileage. In addition, staying under or at the speed limit results in better mileage.
Find the cheapest gas prices. A website such as GasBuddy can help you find low-cost gas and plan your travel.
Both new and used car prices have risen dramatically due to the semiconductor chip shortage.
If you buy a new or used car, be willing to walk away if you do not get your price. Negotiate, negotiate, negotiate. Consumer Reports has found buyers can shave as much as 10 percent of the price of some models by haggling.
The supply of major appliances has been greatly restricted. As a result, prices are high. If you can delay a purchase — do.
Comparison shop. Look for bargains in local independent stores. You might be able to beat the big store price for the same model.
Be flexible. If a feature is not essential, eliminate it.
Function before form. Stainless steel appliances are in greater abundance than other finishes right now. As a result, you can get a better deal on stainless steel appliances.
A Brief History of Modern Inflation
There have been six periods of inflation since the end of World War II. That is when the Consumer Price Index (CPI) hit five percent or higher. That occurred in 1946-48, 1950-51, 1969-71, 1973-81, and briefly in 2008.
The longest period of inflation stretched from the early ’70s to the early ’80s. It was triggered by dramatic drops in the oil supply. First, OPEC instituted an embargo and sent prices at the pump soaring. Next, Iran went into revolt. Soon after that, Iran and Iraq settled into a long war. That war further disrupted oil production.
The price of everything connected to oil went up. As a result, it got more expensive to ship goods. That drove up store prices.
Gas supplies were so stressed that some parts of the country instituted rationing. As a result, drivers had to wait in long lines to get gas. Sometimes fights broke out among drivers waiting in those lines. In addition, highway speed limits were lowered to 55 miles per hour.
WW II Compared to Today
Perhaps the closest economic comparison to the current inflationary trend is the period right after WW II.
Government price controls imposed during the war were lifted. The industry had turned its efforts to war production. As a result, there were vast shortages in consumer goods. On top of that, pent-up consumer demand was unleashed.
Shortage of Consumer Goods
The war had exhausted materials for consumer goods. As a result, consumers had trouble buying goods, such as cars and appliances.
Even nylons were hard to get. The resources for producing hose had gone into making parachutes. As a result, women began painting lines down the back of their legs to create the illusion of a nylon seam.
Too Few Goods To Count
The government stopped counting many goods because supply shortages were so extreme.
“[by] 1943, many durable goods, such as refrigerators and radios, were also dropped from the [CPI] as their stocks were exhausted,” according to a report by the U.S. Bureau of Labor Statistics.
The inflationary period following WW II is most similar to our own.
In the 1940s there was pent-up demand from war. Today’s pent-up demand is from the pandemic.
Industry’s focus on war production led to a shortage of consumer goods during WW II and for some time after. Supply chain disruption and lockdowns account for today’s shortages of consumer goods.
Oil supplies were restricted in the 1940s due to war and postwar activities. Today, supply restrictions by OPEC+ and domestic producers are increasing gas prices adding to inflation.
History may just be repeating itself.
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