Seems like the price of almost everything keeps going up.
That’s nothing new. Today’s governments try their damndest to make it so. Usually, they do a pretty good job and people generally carry on without a fuss.
In Europe, prices are rising faster than they have since 2016. US inflation rose 5.4% year-over-year, its largest jump in thirteen years. China’s producer inflation rose 9% from the previous year, even as consumer inflation remains roughly 1% (suggesting the worst is yet to come).
You might think this signals a coming wave of hyperinflation or massive flight out of fiat and into bitcoin and other cryptocurrencies. “Fiat is dead.”
While that’s not unrealistic, I’d caution against planning around that assumption. Crypto has enough going for it, we don’t need inflation to drive up prices.
We might not get it, anyway.
Inflation or demand shock?
Inflation seems like it has to shoot up. When you throw all that money into the banking system, it’s bound to hit the real economy at some point, right?
How much of our recent rising prices come from disruptions in global supply chains?
Demand for durable goods and commodities has far outstripped supply, producers and shippers lack enough workers to fill their orders, and ports are clogged and backlogged.
Crucial jobs remain vacant, key electronics components remain scarce, and US and China trade policies continue to undermine global commerce. COVID-19 restrictions don’t help.
Some laughed when the US central bank called inflation transitory. Maybe the Fed has a point?
To get true inflation, we need to see a rise in the velocity of money—more money chasing after the same or fewer goods and services.
We don’t see that. In fact, in the US, the velocity of money is going sideways after falling for years. Take a look:
That means money isn’t moving through the US economy fast enough to produce inflation in the conventional sense. Perhaps the same dynamic is playing out in other countries, too?
People and markets adjust
Before we can say with certainty that these rising prices reflect inflation, not a demand shock, we need to see how the markets adjust. That will take time.
Already, people have shifted to alternative sources of building materials or delayed construction projects. Commodity prices and input costs have dropped since the beginning of the year. At the same time, transportation networks have expanded capacity and customers have started shifting to new materials and technology.
Since the beginning of the year, I’ve heard from business owners and seen news reports about rising wages. Yet, I still see labor shortages everywhere.
Some blame generous government unemployment benefits, but it’s also possible that in the post-pandemic era, people can make enough money gigging or working from home. They don’t want to work for a restaurant, in an office, or at a store, and now they don’t have to.
Or maybe people just don’t want to move for work or commute anymore—especially for work that’s physically difficult, boring, dangerous, or annoying.
From what I can see, the vast majority of vacancies are exactly those types of jobs. Retail, food services, transportation, and construction.
Why suffer angry customers, crappy hours, shitty bosses, low wages, inconsistent paychecks, bad working conditions, crappy benefits, risk of injury, and incompetent coworkers when you can pick up a gig job, contract for remote work assignments, or start an online business?
Even if the US government reduces or eliminates unemployment benefits, that may not bring people back to work. Some jobs just suck too much. It doesn’t matter how much you pay, people simply won’t want to do it. They have better alternatives.
Don’t dismiss the forces of deflation
What if restaurants start closing or cutting back their hours because they can’t find enough workers? If delayed building projects get scrapped? If rent, mortgages, and household debt eat into so much of people’s finances, they don’t have enough money for discretionary, inflation-creating consumption? If the stock and real estate markets crater?
What if businesses automate more of their services? Machines cost more upfront but their costs rise little over time (and often go down). Humans cost nothing upfront but their costs always go up over time.
Or if China, with a near-300% debt-to-GDP ratio, has some financial problem that sucks stimulus and capital out of the world’s markets?
It’s hard to get inflation when input costs go down, money gets trapped in financial markets, and the world’s second-largest economy cuts back on stimulus.
You need to plan for inflation. All the major central banks are trying to give it to you.
Just make sure you’re not caught flat-footed if this demand shock subsides and prices go down again. You might not want to pin your hopes on inflation or hyperinflation that never comes.
Bitcoin has so much going for it, you don’t have to, anyway.
Originally published in Cryptowriter.