Unless you have been living under a rock, you probably have noticed that everything is more expensive than it used to. Everything from gas, groceries to essentials like toilet paper are much more expensive than last year. All you hear on traditional or social media is inflation this, inflation that, but they never really get into explaining what it is. Well let’s try to explain it in simple terms ….
What is inflation?
According to Investopedia, Inflation is “a rise in prices, which can be translated as the decline of purchasing power over time. The rate at which purchasing power drops can be reflected in the average price increase of a basket of selected goods and services over some period. The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.” In other words, when inflation occurs, most of the population see their purchasing power diminish.
Causes for Inflation in 2022
There has been much debate on the causes of the rise of inflation in 2022. According to Newsweek, “inflation is currently being driven by energy, labor and housing”.
This is definitely true. The price of gas soared due to an increased demand for gasoline, Russia's invasion of Ukraine and supply chain disruptions induced by the pandemic. Since people are coming out of COVID confinement, they are getting to travel much more than a year ago, not only by car but by air. The war in Ukraine placed a strain on Europe since most of their gas is supplied by Russia. These elements not only had an effect locally, but also globally.
The labor shortage is another cause that will not be solved anytime soon. My question is where did all the workers go? During the pandemic, people who normally worked minimum wage made more money staying home with the government aid than to go to work. Perhaps that was the mistake made by the governments: giving out money for way too long. We see a shortage of workers right across the board in all industries. What is even more concerning is that this is a global trend. Employers have to offer more money to their current employees just to retain them from going elsewhere. Despite this trend, the recent salary increases are not keeping up with inflation, and not solving the worker shortages.
The real estate market is definitely one of the drivers of the current inflation. The low interest rates that went on for years combined with the rocket prices in real estate, especially with the residential housing, created the perfect storm for inflation. In Canada, the average Canadian can not afford to live in an urban area. They have to move to a suburb where is it a bit more affordable, but that landscape is also changing fast. The central banks believe that by hiking the interest rates it will bring inflation down because it should diminish the purchasing power of the citizen, however I am not convinced it will work this time around.
How do we fix Inflation
In the past, raising the interest rates was the way to control the inflation. However, we are living in a different world than in the 80s.
Firstly, governments have been flooding the market with printed money. They have been keeping the markets going artificially for years. When they need money, they just print more. The government’s money has no more correlation with how much gold it owns. This in itself is problematic. Combine this with the high level of debt. It started with the governments and now the average citizen piles on more debt every year. I believe this is the reason why it will take more than just high interest rates to curb inflation.
People have been used to obtaining easy credit for over 25 years. They need something, they go buy it. Many people just pay the minimum payment every month and pile up more debt month to month. The higher prices for goods will not deter them from purchasing anything. In a world with no availablecredit, yes this will work, but not in 2022 on planet earth. As much as there are signs of the higher interest rates are starting to have some effect (gas prices have diminished in the last month), I do not think it will be enough to turn it around on the long run.
How do we fix this? I have no clue and will not pretend to know the answer. There are so many factors that taken alone (energy, housing, labor and interest rates) are quite something to handle. So put them together and I believe something will break at some point. It will put way too much pressure on the current system. It might take different forms, but the current system is not sustainable in these conditions.
I am a fan or Ray Dalio, (Founder, Co-Chairman and Co-Chief Investment Officer of Bridgewater Associates). He has an ease and clarity when he teaches. I found this video about him explaining the potential financial crisis in America. Quite interesting….check it out
If you are reading this is because you read though my article. Thank you for taking the time. Despite the grim view of our current state, keep on smiling.