With an unprecedented amount of liquidity added to the global economy by the Fed and other central banks after the COVID-19 lockdowns, many have warned of hyperinflation. There’s no doubt that prices are going up all around us. Home prices have soared and, with an average price of $25,463 in April, used cars have hit an all-time high. The average price of a gallon of gas is the highest it’s been since 2014. Heck, even the cost of plywood has made securing a second mortgage the first step of a simple DIY dog-house project. This leaves us pondering whether or not these elevated prices are here to stay. Read on to take a look at the different causes of rapid inflation we’ve seen in five products over the last few months.
“Come again?” That’s the quote I imagine we’d get from Henry Ford if we were able to go back in time to tell him that it was a lack of semiconductors that would cripple global production of new cars in 2021. Automakers have dealt with a reduced supply of chips since the pandemic boosted demand for consumer electronics. This shortage was expected to correct itself until a fire at a major Japanese semiconductor manufacturing plant and the deep freeze in Texas earlier this year slashed production again.
With a lack of new car inventory and stronger than expected demand for cars, the used market sopped up as much demand as it could, sending prices to their highest level. While this isn’t a huge issue for anyone that isn’t in the market for a new car, CPI data includes transportation in its inflation calculation. In fact, the price of autos has accounted for over a third of the large April CPI bump that inspired this blog.
Hackers, an ever-increasing threat to our day-to-day lives, can be thanked for much of the surge we’ve seen at the pump. Just as demand from reopening picked up, the six-day shutdown of the Colonial Pipeline by the hacker group called “Darkside” caused widespread gas shortages. Gas stations in the southeast ran dry as cars lined up to stock up fearing even tighter supply. This shot prices at the pump up to a national average above $3 a gallon which is the highest we’ve seen since 2014.
A bushel of corn in 2021 is twice as expensive as it was last year. While I like corn on the cob at a backyard barbeque as much as the next guy, at these prices I’ll stick to potato salad. Well, as long as it’s not German potato salad.
Corn is actually a major input of production with implementation in products like gasoline, processed foods, and livestock. Livestock is one of the reasons for inflated corn prices. China has begun importing more than four times what it typically consumes in corn to regenerate a pig population that was decimated by African swine flu before the pandemic.
After sawmills sent workers home during the pandemic, cutting production by 40%, lumber production is still 16% lower than its peak in 2006. This has shot the price of wood up by 67% in 2021 and over 300% since the beginning of the pandemic! So where is all of that wood going? Surely a little bit of it can be attributed to people looking to stay occupied during the lockdown with a new wood working hobby. Another source of demand is from those that decided a major home renovation was necessary after staring at their walls for all of 2020. The majority, however, is linked to the last product we’ll discuss –
Low supply, cash on hand, low interest rates, and a flight from US cities after the pandemic have created a perfect storm for the housing market as home prices have risen 11.2% year over year in January. While CPI figures use rent as a measure of housing, not home prices, the spirit of this post is to discuss the areas of actual inflation we’re experiencing right now as we exit the pandemic. Also, keep in mind that while inflated home prices are an issue for those looking to purchase, those who already own a home have a much better-looking balance sheet than they did one year ago.
So, is inflation here to stay? The Fed has used new language describing how they now look at their inflation target as a long-term average and would tolerate brief periods over their target. While that would suggest we may see some higher periods of inflation going forward, all of the elements we’ve discussed in this blog have the markings of transitory inflation. That is to say that the factors that have caused their elevated prices are temporary. Regardless of the magnitude of inflation going forward, it is critical that you have a portfolio and financial plan in place that will maintain your purchasing power for years to come. If you’d like help analyzing your susceptibility to the powers of inflation, please reach out to an advisor at Innova Wealth Partners!
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