Unless you’re living under a rock, you are noticing price increases in most of the things you need, such as food, gas, housing and vehicles. Month after month, the US is living through some of the largest jumps in inflation in 40 years. Is it going to stop rising?
One of the responsibilities of the Federal Reserve Bank is to control inflation and for over a year now, we have been told that this inflation is transitory, and it kept rising. Now, the blame has shifted over to the Russian invasion of Ukraine. My friends, you know better, right? I want to introduce some additional factors that contribute to this seemingly global predicament.
We know that when the money supply (creation of money) is expanded, it is inflated. This really only applies to the money that is released to the population in the form of stimulus or benefits. This is when the dilution of money that is already in existence occurs. A diluted money supply begets higher prices for goods and services. We also know that supply and demand have a role in prices as well.
Supply and demand are mostly affected by two factors; Demand Pull and Cost Push. And as you may see, both are also affecting our prices as well. First let’s talk the obvious: Supply and Demand. When there is more demand than supply, prices normally rise, when there is more supply than demand, then the price will come down. Simple enough, right? Now, how about we mess with the easy Supply and Demand concept and introduce a Demand-Pull factor. What will that do? Demand Pull decreases supply when there are too many dollars chasing the supply. Recall from my book, Money Plain and Simple, money must be earned by producing a good or providing a service. If it is only given to spend, then the supply/demand imbalance begins.
Okay, what about the Cost Push? How does this affect the Supply/Demand? Cost Push occurs when prices of manufacturing rises (raw materials, shipping, wages) but the demand for the goods did not change. Basically, it costs more to produce to something and the increase is passed on to the consumer.
Is this a perfect storm for the inflation monster? With the supply/demand piece that includes both cost push and demand pull, the inflation of money supply piece with over 40% of all US dollars created since May 2020, what else is there? Well, let’s not forget the sanctions imposed on the Russian Federation. I have been writing over the past few weeks about the economic war that is being waged upon the US dollar, that is certainly weakening all the while strengthening the Russian ruble. The very thing that gives value to the US dollar is the ‘Petro-dollar’ and now, new agreements are being made to purchase oil in other currencies. Catch my blog here: https://moneyplainandsimple.com/?p=1913 When the US dollars that are abroad and are no longer needed to trade, they will find their way back to the USA. Then even more dollars will be in the system to dilute the already diluted pool.
Where is the CPI now? The BLS (Bureau of Labor Statistics) released March’s CPI (Consumer Price Index) numbers and to no surprise, it is 8.5%!
This is trending in the wrong direction, as there has been an average of 0.5% increase each month for the past 6 months. Where do you think it will go for April? 9%?
There is a saying that goes like this: “The cure for high prices is high prices.” We should hit a price deflationary at some point where the population just cannot afford things and are forced to ‘tighten the belt’. Can you control this? Of course not, but you can take action now to hedge against the inflationary effects since you know where we are heading.
Let me know what you think about this or anything else you would like to read about.
Dinero Simple y Sencillo; Lo Que las Instituciones y la Élite No Quieren que Sepas is launching on the 29nd of March, but a sample is prepared and ready for download www.moneyplainandsimple.com .
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