When Will We Condition Ourselves To Sustained Inflation?

Three things to notice and think about regarding inflation possibilities

  1. A little over a week ago, Toyota announced that because of a shortage of necessary chips, they would cut September production from 900,000 units to 500,000. Other carmakers, from Mercedes to Nissan and GM, have announced curtailed production for want of chips. Do you think the price of the chips that exist may rise? Of course. We could expect that the higher prices will encourage more chip production, or not?
  2. Labour costs have risen. There is a significant shortage of available workers so businesses and others are paying more, sometimes far more, for people. That may end when government benefits begin to evaporate. We could swing from shortage to surplus very quickly. Prices for labour will fall although it may have less effect on ones hired now. Over the longer run employers will choose to automate any job they can. The costs of capital and the regulation around it are known whereas the cost of labour is inscrutable.
  3. Some commodities are expensive. Have you paid attention to the price of wood? The increase was spectacular. It is beginning to fall now and that is disrupting both the building and building supply industries. That variability will dampen down as there is a better match with needs and supply.

Are the effects temporary?

These factors all affect current inflation numbers even though they are clearly temporary maladjustments in the supply part of the economy. Should we expect the reported inflation numbers to decline to former levels over the rest of the year? Maybe not.

On the other hand

Governments have borrowed and spent vast sums of money in the past 18 months or so. That money is still sloshing around in the economy. Some paid down debt, but much of it chased “stuff.” Could be a new boat. Sales doubled. Could be home improvements, or cars, or almost anything. A few needed it for day-to day living, but there is a large supply of new money. Attached to that the ability to spend normal amounts on vacations and the like, added to the accumulation of homeless money.

As people compete for “stuff” what happens? The bid against each other with money as the limiting factor. If you go to an auction, and no one has much money, prices will tend to be low. If everyone has a lot of money, prices will tend to be high. Look at house prices for that example.

Expect inflation for longer than they are telling us

Expect inflation, at least until the extra money is used up. The supply side will eventually catch up, but many businesses will see the aberration for what it is and refuse to increase supply right away. You can’t pay for a factory that requires the high prices to justify its existence unless you are certain those prices will reman available.

The other side

The moral of the story from the other side is authored by Peter Schiff. There will be inflation because You Can’t Print Stuff. Just because there is more demand does not mean there will be immediate supply. There may never be supply and that difference will absorbed by the price level.

Inflation never affects everyone equally. The poor feel it most. People who have saved money and hold it in dollar-denominated investments suffer too. Those who use borrowed money to own productive assets may benefit.

You will need to assess how you fit.

Thanks to Brian Mackenzie for passing the story along.

An aside from comments on the article

You can use 3-D printing to print stuff. While technically true, the limits of expanding production in this way are much like manufacturer’s problem. It might not be economic. A single 3-D printer will have a barely noticeable effect and an army of them would be an expensive way to expand at an industrial scale.

Further to the point, they cannot print everything. For now, and likely for the foreseeable future, they won’t be printing complex computer chips or the terminals that will replace labour costs.

The expectation

  • Inflation will be with us for a while and you should begin to discover what it’s likely effects will be when that becomes obvious.
  • Higher interest rates are one. How vulnerable would that make you?
  • Will automating jobs away be a burden?
  • Will young people be able to find entry level work?
  • Will retraining be a necessity for you?
  • How will government benefits be affected?

Think it through and act early.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com 

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