This Isn’t Your Parents’ Inflation
In February, the Bureau of Labor Statistics (BLS) published finalized numbers for the 12-months ending in January showing a nearly 8% inflation rate from January 2021 to January 2022. What’s on many people’s minds is whether this inflation rate is the beginning of another hyper-inflation period as we saw in the 1970s. For those too young to remember, the mid-to-late-1970s saw a period of significant inflation with peaks at 12% in 1974 and 14.5% in 1980. This inflationary period was made worse by a weak job market and a stagnating overall economy.
Why Today’s Inflation Isn’t The Same
So are we in store for another painful period like we saw in the 70s (when mortgage rates were in the double digits)? The short answer: highly unlikely. Because other economic factors that characterized the inflation of the 70s aren’t present and even the type of inflation is fundamentally different.
Employment
The key thing that made the 70’s inflation so painful is that prices were rising quickly and so was unemployment. This meant that people’s budgets where being hit big on two sides, with less income available to afford ever increasing prices on the goods and services they bought. And companies weren’t doing so hot either, considering their bottom lines were impacted by the same combination. Their expenses were rising, but no one was buying the products the companies had to sell.
Today, we have a strong job market with low unemployment. And current economic pressures are on increasing wages for employees (even without considering political pressures). So, while inflation is uncomfortable, it won’t have the devastating impact on family and personal budgets like it did forty-five years ago.
Opposite Types of Inflation
Additionally, the inflation of today is caused by the opposite mechanism as it was in the 70s. There are two types of inflation; (1) demand-pull inflation where increased demand drives up prices of products there aren’t enough of and (2) cost-push inflation where increasing company expenses push up the prices of products even if people aren’t demanding more. Cost-push inflation is the bad type of inflation.
70’s Inflation: Broad-Based Cost Increases
The 70’s were all about cost-push inflation as the quadrupling of the oil prices (during the oil embargo and the Iranian Revolution) combined with other factors to drive up prices for everything across the board. Today, however, the inflation increases are centralized in a few key industries as shown in the chart from the BLS. And even though energy prices are increasing, they are nowhere near (and extremely unlikely to hit) the 400% of the 70s.
Today’s Inflation: Temporary Production Challenges
Today, inflation is caused by people wanting to buy things companies can’t produce enough of due to temporary production issues; whether it be lack of employees due to the pandemic or ships being unable to offload at the ports or component parts (especially microchips and building materials) being in short supply. Each of these is tied to a temporary issue that will be resolved, even if some take longer than others. Again, the BLS table shows this with energy, food, and vehicles being key drivers of this inflation – all of which have been significantly impacted by logistical, employment, and component parts issues.
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Joshua Escalante Troesh, CFP, is a Tenured Professor of Business and the founder of Purposeful Finance. He works with people across the country on their financial planning needs through Purposeful Strategic Partners, a fiduciary and fee-only financial advisor and a Registered Investment Advisor. He can be reached for comment at info@purposefulfinance.org