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Future Inflation Risk and the Importance of Prudent Spending in Today’s Uncertain Economic Environment

Written By: RAA Financial Advisors

Think back to the best high school or college class you ever took. One of my favorite subjects was economics. That’s because, whether it was Econ 101, or a graduate-level class, we regularly discussed supply and demand. That said, if you ever took an economics course, you’ve seen a version of this chart.

We can use the above chart to help determine what inflation might look like in the coming weeks and months.

Inflation is here, but is it here to stay?

Regardless of what’s going on in the world, the price something sells for will be where the supply and demand lines intersect. Unfortunately, there is a lot going on in the world. For just one example, COVID-19 has dramatically affected supply chains, which has led to a serious microchip shortage.

How did it happen?

First, COVID-19 caused semiconductor factories to shut down, which reduced the global supply. Then, as the world shifted to working from home, companies had to outfit their employees for the transition, so demand soared for the electronic equipment required to make that possible. Of course, this equipment requires microchips to work, and so the demand cut into the available supply of microchips for all sorts of other products. (And that, believe it or not, is one reason why there’s a shortage of new cars for sale.)

Without going through a series of shifting supply and demand charts, the takeaway is that Econ 101 tells us prices (inflation) will rise because of supply chain dislocations.

Another factor that could cause high inflation in the months ahead is increased consumer spending as the economic reopening speeds up. Over the past year, savings have ballooned thanks to the unprecedented amount of fiscal stimulus (i.e. those checks the government keeps sending out), along with the simple fact that those who kept their jobs didn’t have nearly as many places (or ways) to spend their money.