The BIG Question: Why are prices going up? Why do some commodities increase in cost so quickly? How is inflation measured? Join us as we discuss the causes of inflation and how the steward approaches this concept.
Why are prices going up?
In order to answer that question we need to understand a few basic points.
- What is Inflation? It happens when the costs of goods increases resulting in the purchasing power of the dollar decreasing.
- How is it measured? The US government tracks inflation monthly through several indexes. The most common measure is called the Consumer Price Index (CPI) which tracks the price of a basket of goods and services (things like transportation, food, and medical care). The preferred measure that the US government uses is called the Personal Consumption Expenditures Price Index(PCEPI) which is another way to measure changing costs of goods and services.
- Is inflation good or bad? The answer is that generally speaking, low to moderate inflation is actually good. If inflation is too low, the economy may stop growing and wages do not increase. If inflation is too high, prices increase so rapidly that consumers stop spending, slowing down the economy and reducing company profits. Think of it like Salt, not too little or too much… you want it just right. The fed wants to keep inflation around 2%.
- What Causes Inflation?
- Money Supply
- Supply
- Demand
- Wages
- Commodity Prices
- Systemic Shocks (Oil, war, Natural disasters, trade wars, tax rates)
So All that said, Why are prices going up Now?
- Covid Demand
- Major shock to global economic system. Some say the current inflation rate is “Transitory” or temporary, caused in part by the significant decline in prices a year ago. When we look at prices today compared to 1 year ago, yes, inflation looks really high. The question is will the current inflation rate continue or moderate over the next few months.
- As COVID restrictions are lifted, there as much pent up demand for things like eating out, vacations, travel. More people return to the economy and spend, you will see prices go up. Demand is really high.. Will it continue? Is it sustainable?
- Supply Chain Shortages
- Businesses can’t get the raw materials that they need to make their products
- Price of raw goods is going up.
- Commodity price increases
- We are seeing prices of Lumber, Oil/gas, plastics, and rare earth metals increase.
- This is sometimes difficult to understand what is causing the prices to go up. Oil makes more sense than some other commodities. Soy and corn - way up
- Employment
- Can't find enough workers. More job openings than at any other time in recent memory.
- Causes wages to rise. Pay more overtime. Prices go up.
You have just learned all this great information, but what are you to do about it? What should we do about inflation as a Steward? We will discuss this next time on The Stewardology Podcast!
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