Aftermarket Dave Baiocchi
Inflation – OMG! In December of 1980, I left college and got my first full-time job. We had just elected Ronald Reagan in a landslide election, but Jimmy Carter was still the President. The hostages in Iran had been held captive for over 400 days. The unemployment rate was eight percent. Our economy was facing runaway inflation. Nobody knew quite what to do, or what to expect next. In 1976, the inflation rate was 4.6%. Four years later it had skyrocketed to 12.5%. The Federal Reserve uses interest rates as their primary tool to stem the tide of dollars flowing into the marketplace and bring inflation back under control. In the six-month period from June to December of 1980, the federal funds rate was raised six consecutive times, starting at 8.5% and topping out at 20%. The prime rate in December was an astronomical 21.5%. It was a portentous moment to start a career. The standing joke of the day was: “I dozed off for a moment…. did the prime rate go up while I was asleep?” We only laughed to keep ourselves from crying. Only people born before 1960 were affected by (or even remember) this near-catastrophic economic upheaval. Ronald Reagan re-ignited the economy using tax cuts, deregulation, and incentives. Life went on…prosperity returned. That was 40 years ago. 40 years is a long time. How quickly we forget the tenuous economic legs on which we stand. For the rest of the ’80s and most of the 1990s, we were able to enjoy a robust economy, while maintaining control over the money supply. Rates were moderated with the FOMC occasionally adjusting federal funds rates which averaged between 3.0 - 5.0% through the mid-2000s. Then in 2008, an unprecedented banking crisis nearly took the country into a deep depression. Credit tightened, as banks had to adjust to new regulatory parameters. The Federal Reserve, in an effort to soften the severity of the economic impact, started printing money (using the bond market and a new euphemism called “quantitative easing”). They also lowered the fed funds rate to
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www.MHWmag.com
March 2022
spur borrowing of those printed dollars, in an effort to get the economy moving again. All of this phantom liquidity caused some concern. Rewind to 1980. Too many dollars, chasing too few goods equals inflation. Surprisingly…inflation did not materialize. So, the Fed lowered rates again…and again…and again. From a high of 5.25% in June of 2006 to a low of 0.25% in December of 2008. For the next 13 years (with a few notable exceptions), the government has kept printing money and making it available to banks at nearly zero net cost. This left many (myself included) scratching their heads about the mathematics connected to economic inflation. The banks, the investment firms, the government bailouts, the low-cost loans, and even a worldwide pandemic could not seem to stir the inflationary beast. Funny thing about inflation; by the time you figure out it’s started… it’s already out of control. Well, it seems the wildfire has been started…on a very windy day. The supply chain crisis has finally kicked us over the edge of the inflationary cliff. All of the printed dollars circulating in the economy have fewer and fewer places to go. Cars, machinery, real estate, clothing, food staples, gasoline, building materials, and nearly every other consumer and commercial category are facing rising prices as demand increases, and supply shrinks. In January of 2021, the CPI inflation index was at 1.4%. It DOUBLED two months later (Mar 21 -2.6%). Then it doubled AGAIN on May 21 (5.0%). At this writing, the numbers for November were just published at a staggering rate of 7%. Ships are still waiting to unload at the ports, shortages are becoming commonplace, and makers of microchips are still reporting lead times that extend well into 2023. Yes…. we need microchips to build forklift trucks. Inflation is not “on the horizon”. It’s not “transitory”. It’s here…it’s real and as dealers, we are directly affected by it. For the past 40 years, we have not really had to deal with spiking prices. Our SOP’s, our pricing policies, our
