Why Are Prices Going Up?

- If you've bought virtually anything in the last year, you know that prices are going up.

And it's not just in the US, either.

Many wealthy countries are experiencing similar trends.

- So what's going on here?

The short answer, you've probably guessed, is COVID.

But... - Wait, wait, wait.

- Philip, what is going on with your mustache?

- Oh, well, it was supposed to be a surprise, but with everything being so expensive, I had to sell my mustache.

(Julia gasps) but I used the money to buy you this gold chain for your pocket watch.

- Oh, that's so ironic.

- Why?

Because you sold your pocket watch to buy me a mustache comb?

- No, because I don't have a pocket watch.

Sorry.

Did I say ironic?

I meant weird.

(upbeat music) - Around March of 2020, you may recall, people stopped going out.

They canceled their vacation plans, stopped going to movies and restaurants.

Many even stopped going to work.

This led to a huge drop in demand in many market sectors.

People weren't spending nearly as much as they usually did.

- If you've ever run a business, you know that when demand for your product goes down, you can't just sit around, waiting for it to go back up.

If you're going to survive the downturn, you have to start scaling back, which is what many companies did.

Factories were closed, parts and equipment sold off, workers furloughed.

Airlines canceled flights.

The rental car companies sold off huge portions of their fleets.

Even shipping companies hunkered down by redrawing their schedules to ship fewer products on more efficient routes.

It's almost like the global economy went into low power conservation mode, trying to hibernate through the winter of COVID.

- But the global economy is like a finicky engine.

It can run fine for decades, but if you turn it off, you can't just start it back up again without problems.

Closing a factory is a lot easier than reopening one.

You need equipment and material from other manufacturers that may not be reopened yet themselves.

And you need to rehire your workforce that may not feel like going back to work yet.

- Another thing they didn't count on was government assistance.

The governments of many wealthy countries offered generous unemployment benefits and tax rebates to keep their citizens afloat during the crisis.

Since families were spending less, savings rates skyrocketed.

- All this meant that when the pandemic seemed to be waning in mid 2021, people were suddenly ready to spend money again.

Lots of it.

And many industries were caught off guard by the surge in demand.

- Now, if you think they should have been able to see this coming, keep in mind, these are unprecedented times.

The last time we had a global pandemic this bad was the Spanish flu in the early 20th century.

And the economies of the world are far more interconnected and interdependent than they were then.

One item on a store shelf might require components from more than a dozen countries.

- In the rush to get materials and ingredients where they need to be, shipping routes and ports have become hopelessly snarled and overcrowded.

And the ongoing labor shortage means there aren't enough dock workers and truck drivers to unload and move it all.

The result is hundreds of cargo ships, just sitting idle in ports all over the world.

- Another unfortunate factor contributing to inflation is extreme weather.

Droughts in the West are killing crops.

Floods and fires are disrupting transportation.

And here in Texas, which happens to be one of the biggest producers of plastics, the power grid was crippled by a freaky cold snap we had last winter.

As a result, product packaging is still expensive and hard to come by.

- Upshot of all this is too much money chasing too few goods, the classic cause of inflation.

By all metrics, this is the worst inflation we've experienced in decades.

And while it wasn't unexpected, it has gone on longer than anyone thought it would.

- There are several hidden pains of inflation beyond sticker shock.

For one, because it disproportionately hits everyday survival items like food, shelter, and gas, it causes outsized harm to poor people who spend the majority of their income on those things.

Second, it devalues personal savings.

If you've managed to squirrel away $15,000 for a rainy day, that money suddenly has less purchasing power.

- And inflation also invites predatory pricing.

As the CFO of ConAgra said, "Price adjustments are more likely to be accepted in the market when industry-wide and broad-based input cost inflation occurs."

In other words, people are more likely to accept price hikes if they think it's part of a widespread trend.

There's already some suspicion that the meat industry is raising their prices above what inflation would suggest.

OPEC and Russia are refusing to increase oil production, which would lower prices, and the shipping industry is having one of its most profitable years ever.

- Now, before anyone panics and does something crazy like selling their facial hair on eBay, let's look at the positives.

Most of the causes of this inflation are temporary.

It will take some time, but manufacturing will ramp up to meet demand.

Supply chains will eventually untangle, and people will spend through their savings and return to work.

And most other metrics of the economy are doing really well.

Wages are rising, especially among low income workers, unemployment is falling, and the stock market is booming.

- But inflation is one of the most psychologically painful negative economic trends.

You might not keep close track of how your IRA is doing, but you are very aware that milk costs more today than it did yesterday.

Even if your wages are keeping pace with inflation, it still feels like you're getting ripped off.

And if people start assuming that prices will rise indefinitely, well, that's what inflation can become a very big problem.

- Economists call it a wage-price spiral, and it occurs when enough workers start demanding raises to compensate for price hikes.

Higher wages increase the cost of production, which means higher prices, which spurs demand for more raises and so on, with seemingly no ceiling to how high the numbers can go.

- This does not seem to be a danger right now, but if it becomes one, there are things the federal reserve can do to fight inflation.

Namely, raising interest rates.

If it becomes more expensive to borrow, people will be less likely to spend, driving down demand.

The drawback is that this also slows down growth and our economy still has a lot of healing to get back to where we were before the pandemic.

The last thing the fed wants to do is stifle the recovery.

- So what can you do?

Well, not much.

There are some investments that are considered safe during times of inflation, like TIPS, government bonds that match the rise and fall of inflation.

Real estate usually performs well when prices go up as well.

However, many advisors caution against doing anything drastic.

Again, this is an unprecedented time, and no one really knows how financial markets will react in the coming years.

- No one likes higher prices, but panicking or assuming the worst can actually exacerbate the problem.

Most Americans, though pessimistic about the national economy, actually feel pretty good about their own financial situation.

- Meanwhile, this bout of inflation can serve as a reminder of how interconnected the global economy is.

Instability anywhere is felt everywhere, which is reason enough for us to care about what goes on on the other side of the world.