April 12, 2022
Inflation. Not a word we like to hear, that’s for sure, and unfortunately, we are getting nailed with it right now. And of course, the political blame game has ensued with finger pointing, mudslinging, and some trying to use it to their advantage in upcoming elections. But let’s get real about why we are being slammed with rising prices.
Multiple factors are coming into play that are driving the inflation we are seeing these days. Early in the pandemic, demand for many goods and services (such as gasoline, dining out, buying vehicles, and more) dramatically decreased. Prices often decreased as well. This was seen with oil prices. Then, economies started to pick back up, and demand for many goods and services also increased correspondingly. But there have been serious supply chain problems creating a situation where supply has frequently not kept up with demand. This has created bottlenecks and raised prices of numerous goods and services. When this type of thing happens to enough goods and services, inflation results.
As to why supply has often been lagging behind demand, there are multiple reasons, but the Pandemic has been a major one. The COVID Pandemic has been fluid and worldwide. Some areas get hit with surges more severely than others and often at varying times. Also consider how different places don’t necessarily respond the same way. Think about all that. This means that while one area has high demand for a product, another area that may be key in producing or transporting it could be facing serious limitations because of a surge. Consider it this way: when a bad surge is affecting an area, a significant number of factory workers may be out sick. Output from that factory thus decreases. At the same time, a significant number of truck drivers and port workers may be out with COVID, which in turn makes transportation of products being produced more difficult. And when the demand for the factory’s product is still high, it gets more expensive for those buying it. Another factor involved in worsening inflation is that when the prices of certain key items or services (such as oil) go up, they can have ripple effects, driving up the prices of many other goods and services. Oil is a good example of this. When oil prices go up, transportation costs of goods go up which make those goods more expensive (be it food in grocery stores or smartphones in electronics stores). Another example is the shortage of semiconductors and periodic disruption of other parts needed to build automobiles. This has led to a shortage in the number of vehicles being produced at a time when demand for new vehicles increased. The result: it’s more expensive to buy a new car. In the United States, there has also been a shortage of truck drivers (rising fuel costs and other factors have likely lessened the number of people wanting to pursue this career). Yet, products still need to be shipped, so here’s another factor in the supply chain problem going on. Greed also comes into play, with the oil industry being an example of that. Oil producers (including US companies and OPEC) have resisted the idea of temporarily increasing oil production to lower prices, in large part because they don’t want to lower their profits (they’ve had high profits lately).
So when you consider the number of ways the supply of goods and services are being disrupted these days, it’s clear that this is a major driving force in the inflation that we are seeing around the world. That’s right: inflation is striking around the world. Not just in the United States. And Russia’s brutal invasion of Ukraine is also playing a role since Russia is an oil producer (European countries have relied heavily on Russian natural gas). It’s also clear that this inflation situation would have struck no matter who was in the White House and Congress. Government spending (which includes COVID stimulus bills during the Trump years) may be contributing to some degree as well, though I think the supply chain problems that have been exacerbated by the Pandemic (and now the war in Ukraine) are the primary factors. In terms of combating the rise in inflation that we are seeing, there is no single way to stop it. Fixing the supply chain problem would be a big one, but seeing how the supply chain situation is so complex and global in nature (and that COVID is still around), there is no simple fix. President Biden is trying to battle rising gas prices by attempting to get oil producers (like US oil companies, Saudi Arabia, and others) to increase oil production, but he can’t order them to do so. Releases from the US Oil Reserves have also been authorized as has increasing the percentage of Ethanol allowed in gasoline). Efforts are being made to try to alleviate the bottlenecks US ports are grappling with (like getting the port of Log Angeles to operate 24/7), and the Federal Reserve is likely to increase interest rates several times this year as it fights inflation. I also think we need to speed up the process of shifting away from our reliance on fossil fuels and increase the use of renewable, clean energy because this would help combat Human Caused Climate Change as well as make us less susceptible economically to the whims of the oil market. But the brutal truth is that there are limitations on what the White House and Congress can do to slow down the inflation we are experiencing, especially in the short term. It will almost certainly take time for the situation to improve.
Views and Observations 