Gil’s Musings

The Great Inflation Debate

Inflation 2021

Signs of inflation abound with chip shortages, car shortages, and sky-high lumber prices, among others. Many forecasters are predicting 70s style inflation or even stagflation.  Given the similarities in Jimmy Carter’s and Mr. Biden’s policies, it’s a valid concern. 

Yet, I feel there are extenuating circumstances this time that give me hope that we can stave off the worst of it. I still feel that technological advances are fueling disinflation through many avenues, such as robotics displacing workers more cheaply, among other trends. Twenty years ago in these very pages, I wrote that the day would come when advancing technology would be used to create ever more powerful new technologies in a layering process. I had no idea I would live to see the day of GPS controlled farm equipment that crop dusts and harvests in unmanned vehicles with inches of precision. This efficiency drives down costs of production and minimizes waste. It also de-risks one of the riskiest professions in the world: traditional biplane crop dusting. 

SUPPLY & DEMAND

The other half of inflation is the supply side. It’s not difficult to imagine the yearlong Covid shut down caused much production to cease. That interruption of supply and the sudden spike in demand seem to be aberrations that will normalize over time. I’m not saying that prices won’t settle in at an elevated level; they might. But I am saying that 600% rises in plywood prices are unsustainable because demand will retract in response and economics motivates producers to fill any gaps with supply as soon as possible. 

Inflation is typically found at that point where demand exceeds supply. This is normally a monetary phenomenon and may be this time too. Surely, the repeating and ill-advised stimulus checks are creating demand out of thin air. Compensation for work is a balancing force because producing and consuming are matched. But stimulus checks don’t have a matching production side, which destabilizes the system. Barring a reverse action, this cash will stay in the system and support demand in typical cycling fashion.

In the end, I think elevated inflation fears are overblown relative to the short-term phenomena of vacuums in supply and spikes in demand that will both abate over time.  

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