Inflation: What Is It and Should We Worry?

By Judy Loy
Registered Investment Advisor, ChFC®, RICP® and CEO of Nestlerode & Loy, Inc.

As we move into an expansionary economy, the good news abounds and many are feeling better and safer in their jobs and life. Families are more stable with less debt and more savings. Pennsylvania is opening completely (other than masks) on Memorial Day, which will help service industries that were hit hard during the lockdown. Penn State’s athletic department is outlining attendance at events, concerts dates are being announced and most fall classes will be in person. The return of the consumer is great news for businesses but many face issues with supplies.

While the economy, earnings and employment show positive movement, demand is up but the shortage of supplies is leading to higher prices. As many did during the pandemic, my husband and I remodeled our kitchen and family room. We ordered furniture in January and we have not received any of it yet — the expectation is for it to arrive in July and August. Furniture manufacturers are overwhelmed as demand is up over 100%, but factories are behind after having been closed during the lockdowns. On average, furniture is taking 20 to 26 weeks. Supply and demand is an economic model of price determination: when demand outstrips supply, prices go up.

For people building new homes or renovating, the cost increases are staggering. A headline in CNN business stated, “New Homes cost $36,000 more because of an epic shortage of lumber.” According to that report, the median price of existing homes surged by a record 17.2% in March 2021. Lumber prices are at record highs. Chicken shortages are now causing shortages in tenders, filets and (Noooooo) wings.  Due to increased demand and a shortage of workers limiting production, the cost of chicken has gone up at a 11% annualized rate. With talk of a higher minimum wage, wage push inflation would occur because employers will pass on the higher costs to their consumers. Used car prices soared 17% annually in seven months last year due to limited supply and increased demand. 

Inflation is a rise in prices over time, which decreases the value of money. In other words, your dollar will buy less because the price of what you want to buy has gone up. A general rise of prices is normal and shows growth in an economy.  When an economy overheats and inflation goes up rapidly, problems occur. The U.S. Federal Reserve is tasked with keeping inflation in check and not letting it get too low or too high. To reduce inflation, the Fed will raise its interest rates to slow the economy and bring inflation down. The downside to rising interest rates is if they get too high, it can stall the economy and cause a recession. Higher interest rates also tend to negatively affect earnings and stock prices.  

The main inflation question is: will the inflationary pressure continue?  If so, the Fed may be forced to raise interest rates and derail the economic resurgence we are enjoying. The inflation goal for the Fed is 2%, but they will allow it to go higher temporarily to allow the economy to recover and not derail all the stimulus thrown into the economy. Currently, Treasury Secretary Janet Yellen and the Fed are expecting strong growth and inflation to return to “normal” levels after this short-term surge.

All investing is subject to risk, including possible loss of the money you invest. Nothing in this article should be construed as investment or retirement advice. Always consult with a professional advisor and consider your risk tolerance and time to invest when making investment decisions.