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Factors that Influence Inflation

Factors that Influence Inflation

May 25, 2021

Rising prices are more technically known as inflation. It is one of the primary topics of conversation with clients currently. With higher prices comes increased cost for everyday goods and services as well as the need to earn a return that will maintain purchasing power of our dollars. I will highlight a few of the issues influencing today's inflation environment.


Low Baseline - Many sectors such as travel and leisure experienced significant price declines last year. As the economy reopens, prices are significantly higher than last year's bargains, leading to an eye-popping inflation number. This pace of increase is not sustainable but prices will likely continue to increase as more people travel with their additional cash they saved up last year.


Supply chain disruptions - Typically with a sharp recession you will see a decrease in demand. Last year, however, we saw an increased demand in certain areas such as building materials, but a decrease in supply due to supply chain disruptions.


Wage growth – Typically in a recession we would expect wage contraction. In the most recent recession, unemployment rates (except for the travel and leisure sector) were stronger than normal. Those out of work were receiving generous stimulus payments. April 2001 unemployment was 6.1% (Source: Bureau of Labor Statistics). Employers have had to increase wages to entice workers back into the labor force. This increases costs which are then passed along to the end consumer.


Resolution – We would expect demand for materials to slow as people transition to more services like dining out. Producers are also working to increase supply which should correct imbalances.