October 13, 2021
$12.95 for an order of kids’ pancakes?!
Recently, I was out to breakfast with my family at a local diner, when I was shocked to see some of the inflated prices on the menu.
This same set of silver-dollar pancakes cost $6.95 when I visited this place three months ago.
This was a brand-new menu, complete with inflated prices.
And this diner isn’t the only place in town raising prices… Everywhere you go now, you should expect to pay more.
I’ve warned of this since last summer… And now all the data is piling up – the Federal Reserve’s measurement of inflation just posted its highest increase in 30 years.
Meanwhile, according to the Consumer Price Index, prices on consumer products have risen more than 5% for the past four months straight. And I anticipate, judging by the 8.3% increase in producer prices, they’ll soon go even higher.
But $12.95 for kids’ pancakes?
Inflation can really feel like a punch in the gut… especially when it was supposed to be only “transitory.” And yet, higher prices are somehow transitioning into next year.
At least, that’s what the head of the Federal Reserve told a panel hosted by the European Central Bank late last month…
As Jerome Powell spoke about the challenges ahead, he informed his listeners that he, too, was “frustrated”…
It’s frustrating to see the bottlenecks and supply-chain problems not getting better – in fact, the margins are apparently getting a little bit worse… We see that continuing into next year probably, and holding up inflation longer than we thought.
Unfortunately, Powell and his team seem to be realizing the effects of all their money printing just a bit too late…
Inflation is here, and it’s not going away anytime soon. The question now is, how do we prevent it from squashing the little growth America has seen?
As this country experienced in the 1970s, inflation can have extremely detrimental consequences… Not only does it cause prices to spike, but inflation also erodes purchasing power, decreases the value of cash and investments, and can cause interest rates to rise.
The Fed’s Shadow Play
I remember when Powell was appointed chairman of the Federal Reserve. I had high hopes because he was someone who hadn’t spent his entire life in an academic ivory tower nor in a Washington, D.C.-based think tank… Rather, Powell had some real-world experience on Wall Street as an investment banker.
And in 2018, I applauded him for resisting the temptation to print more money – despite the former president’s insistence that he do so. (In fact, it was in an interview with me, on-site at the White House, in which then-President Trump first slammed Powell for failing to act like other Central Banks around the world.)
How things have changed…
While the Fed’s intervention in the spring of 2020 during the height of the pandemic was understandable, the continued meddling from the Fed has since become problematic. We now risk too much money in our system, too much printing, and therefore, too much inflation.
Since President Biden took office, Powell seems to have drunk the Kool-Aid and somehow believes the Fed is capable of controlling our financial future. The central bank’s balance sheet has now soared to more than $6 trillion.
And he’s suddenly “frustrated” when he realizes all this money printing is leading not to greater levels of employment and more robust economic fundamentals, but instead a mass increase in inflation.
Food prices are up 3.4% from this time last year. Gas prices are up 41%. Diaper prices are up 14%. Fresh fruits are up 5.4%. And donuts are up nearly 3%.
Wages, meanwhile, adjusted for inflation, are down 1.2%.
And judging by all the recent headlines about supply chains, it’s clear prices are only going to tick higher…
I spoke with my contractor recently about adding some built-in shelves in one of our bedrooms. He had just given me an estimate a couple of months ago. But when I called him this week to give the green light on the project, he told me he needed to revisit the numbers. “Everything is more expensive,” he explained.
The pandemic, labor shortages (more on that in a minute), surging prices of raw materials, and transportation backups have come together to create a perfect inflation storm…
According to the Washington Post, today the cost of shipping a container from China to Los Angeles is quadruple what it cost in January of this year.
The other day, American Consequences contributor Scott Garliss told me about something that happened to a friend of his that speaks volumes about our current predicament…
One of the guys I bike with in the mornings owns a roofing company that does residential and commercial work in D.C. and Virginia. They’re incredibly busy and have lots of work potential with jobs they’re bidding on. This morning, he told me they had a strange event take place last week.
It seems one of their main suppliers held a global conference call with all of its customers and the supplier said not only was it no longer guaranteeing dates on orders already signed, but that the prices on those same orders were no longer guaranteed anymore either!
Apparently, the biggest issue is the lack of raw materials needed to make the items they need.
Think about that… If prices can no longer be guaranteed, how can anyone really do business?
My contractor needing to revisit pricing for some built-in bookshelves is one thing… But companies performing large-scale commercial work is another.
If we can’t have confidence in global supply chains – and if we can’t have confidence in pricing – how do we plan for the future? How do businesses function?
It’s a major problem that we’re just beginning to see the effects of…
A new system shows which stocks could soon rise 100% thanks to a Connecticut couple’s catastrophic 401(k) loss.
Overtaxed and Underworked
Meanwhile, it’s not just raw materials that are causing angst in the economy… It’s labor as well.
Recently, I spoke with one business owner in the food-supply industry who told me that while it’s possible to hedge some of the materials’ costs… there’s no hedging labor:
When we raise wages, and then the factory down the street raises wages, we raise again. But how long can we do this? When does it stop?
Higher wages, of course, mean one of two things: either lower profits… or higher prices for the goods being made.
Businesses are facing this challenge as they seek workers. Some Americans are making an educated choice to exit the labor force. The pandemic, perhaps, has taught them that they don’t need as much. They’re happy to get by with one less vacation, or fewer nights out… Or in many cases, the plethora of government-aid programs has made it more attractive to just stay home.
Whatever the reason, it’s clear that businesses are finding it more and more challenging to find workers. They’re raising wages, but the money has to come from somewhere.
And then there are taxes…
Washington desperately wants to tax businesses more. And on the Democratic side of the aisle, there is little-to-no appreciation for what that might mean for businesses themselves.
Indeed, White House Press Secretary Jen Psaki showed her economic naiveté when she claimed in a press briefing in late September that it would be “unfair and absurd” for companies to raise costs on consumers in response to the Biden administration raising the corporate tax rate.
And it seems President Biden shares that sentiment…
In a CNN town hall over the summer, he had no sympathy for a small-business owner that was struggling to find servers at his local restaurant. The answer, according to Biden, was to simply “pay more for wages.”
But realistically, how can a business pay more without reducing its profitability?
Daily Price Hikes
The real danger here is that we’re entering an environment where businesses will not be able to function as normal or successful.
Take Scott’s story… How can a roofing company provide a customer with a quote and a completion date if it has no idea when the materials will even be made available or what they’ll cost?
Americans have never quite experienced hyperinflation, so there’s little appreciation for how bad this could really be. Sure, people remember the 1970s, and those were lousy years… But to really understand the disaster that inflation represents, you need to examine the economies of Latin America.
A friend of mine worked for an American investment bank in Rio de Janeiro in the 1990s. I was stunned when she explained to me how they used to pay her every day. Not once a week or bi-monthly like most institutions – a daily paycheck.
They had to because the currency was soaring… And by the next day, your paycheck could be worth less.
It’s hard to imagine, but between January and March of 1990, hyperinflation took hold in Brazil. Monthly inflation rates were in the 70% to 80% range.
For the next 10 years, Brazil grappled with high-double-digit monthly inflation and hyperinflation (defined as more than 50% for a month).
Restaurants would change their prices daily (if not by the hour), and menus were never printed but rather written on chalkboards in order to account for the constant rise in prices.
To this day, Brazilians will tell you their biggest economic fear is not a recession, but rather inflation. They’ll take an economic downturn any day over escalating prices that make it difficult for the economy to function.
Now, the U.S. has never experienced inflation to that degree… And I don’t believe we’re at risk for seeing anything quite like the South American genre of hyperinflation.
The U.S. dollar still reigns as the world’s reserve currency… That’s huge.
So while this country shouldn’t see insane inflation like Brazil, we’re experiencing rising prices. And even though it’s not of the South American variety, it takes its toll.
Higher prices are here, and their effect on supply chains, labor, and thus the overall economy is still a real unknown.
My biggest worry is a repeat of 1970s-style inflation – one in which economic activity is suppressed in part thanks to this lack of clarity on prices. Earnings would suffer, and prices would continue to go up – not an ideal combination.
And if we wind up with more taxes as the cherry on top, then we’re looking at real economic consequences.
Now in theory, at some point, the price gouging should subside. If no one’s buying those $13 silver-dollar pancakes, then the prices should come down, right?
But I’ll leave you with one last question: When was the last time your local restaurant slashed prices?
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Publisher, American Consequences
With Editorial Staff
October 13, 2021