What is another word for inflation? Overspending! People spending too much causing demand shortages, production increases, overshoots on jobs and growth, rising wages and ultimately, higher costs. In the end, people and spending habits are the crux of the problem, and the overall result is felt by everyone. Spending is a funny behaviour. Spending can be driven by emotion or need, but the former is the more harmful driver. Emotion will make you buy things you don’t need. You think you need something to make you happy or fulfilled, when in fact you don’t (the Peloton phenomena). Wants should never be confused with needs. You may be buying things out of the fear of some future effect, for example the fear it will cost a lot more in the future. That is the effect rising interest rates are having on the housing market right now, people are trying to break into the housing market now before interest rates rise. When in reality, it will also (usually) cost less in the future if you are patient. Interest rates are increased gradually by central banks to cool spending and aid in reducing inflationary pressures, and they generally work (in time). There are several rate hikes planned and openly talked about for 2022. These things have, and always will, happen in cycles. You need shelter and food, but you do not necessarily need a new house, new car, or new iphone, and especially do not usually need them in an inflationary environment.
Banks love people who cannot live within their means, as long as you can afford it. This is how banks remain one of the financially strongest companies in the world. They are very happy to look after your cash, and rent you more if you want it and can afford it, wrapped up in all kinds of services and offerings you think you cannot live without like loans and credit cards. Loan and credit card interest is basically the rent you continue pay on the part the bank still owns. If there is one thing I hope to have taught our kids, it’s not to have unecessary debt. Or, at minimum, .. what is good debt? You should never put anything on your credit card you cannot pay off immediately. Anything you can effectively save towards, you should not borrow against. Cars and vacations,.. for example, are better saved towards. Anything with a promise of appreciation or adding tangibly to your asset base or net worth, you might consider borrowing against. The list becomes quite limited here, but may include a first home, business, or an investment. When I was younger, I often borrowed to maximize my RRSPs and paid them off quickly in the following months by working overtime. In hindsight I could have done this much better through automatic monthly deductions and paring back my annual spending habits, which would have netted the same effect without any interest payments and supported how I look at (and preach) things now. At any rate, a level of discipline is required to save and continuously increase your savings.
Inflation puts the economy in a precarious position where recessionary forces will come into play in some way in the future. How can they not? If you drive people into areas of unaffordability on the basic needs of shelter, food, transportation, and clothing there will be a degree of spending sacrifice forthcoming. Wants will need to be shelved for needs. There will be companies that ramp up their production and jobs to satisfy these temporary, inflationary, higher demands, only to have to cut back at some time in the future when the cooling effect of interest rates and higher inflation kick in. But it’s not that simple. There are large companies with deep pockets and strong balance sheets that do not need to borrow money to grow their market shares. They are already flush with capital, and even more-so following the pandemic. Smaller players will either go out of business or get gobbled up by conglomerates during tough financial times. This is already happening e.g. Royal Bank buying Brewin Dolphin today, a wealth management company based in the UK and Ireland, for $2.6 bb. The market shares in companies will shift around as these kinds of large acquisitions happen.
Why do people who make $60k a year spend $70k a year? This scenario is more common than we think. Anyone who wants to build resilience to inflation should be looking hard at their budgets. There is always fluff, there are always behaviours to address, and we need to separate needs from wants in times like this. People are funny (entitled) animals, and they are unwilling to give up their brand name items for no-name items, buy used versus new, or even put off a purchase (or ten) til inflation settles down. They will instead want (bigger) raises at work to be able to maintain the high standard of living they’ve become accustomed to, whilst claiming inflationary pressures, when what many really need to do is give themselve‘s raises by lowering their spend rates well below their income rates. Or conversely, increase their income rates, though this takes a lot more effort and time. I believe everyone should aim to save 20-40% of their earnings. Everyone should review their income and savings possibilities annually.
Inflation has recently been hitting gas prices hard. Consumer natural gas and gasoline has been 2-3X historical prices. There are a lot of mechanics behind these elevated prices, but consumer demand is always a huge part of it. Hydrocarbons are entwined in almost every product we use today; from food to pharmaceuticals to plastics to textiles to metals to gasoline and beyond. There aren’t really any products that are hydrocarbon-free. Again, if you want to curb hydrocarbon demand, curb your spending.
Biden announced recently the USA is opening up 1mm barrels per day of it’s oil reserves into the market, in an effort to curb prices and bridge the supply shortages. However, this is not a solution, .. only a bandaid and vote-getter in my opinion. In a world consuming 100 mm barrels of oil a day, 20 mm per day of which is used by the USA, this amount is minscule. Plus, who is to say USA reserves are cheaper than foreign imports? All it does is temporarily create a (small) glut in a market where OPEC has the most control and almost always wins. The only action that will have a long term effect on lowering sovereign oil prices, is to increase your country’s oil independency. However, the USA position on hydrocarbons remains extremely negative (like Canada), while the renewable or electric energy infrastructure severely lags the overall plan for change. There are too many mixed messages and unclear plans and timelines do not promote confidence in the energy industry to make the necessary changes.
Furthermore, Biden announced a plan today to move away from higher energy-use to low-energy use appliances, vehicles, and heating-cooling systems through legislation. This will not come without further demand and energy requirements to produce this change, which could lend to longer-term inflation than was first estimated (years). Technology may fix some of this, but technology is not a quick-fix. I think oil will get more and more expensive in this environment, which will cause more and more pain for consumers in a world where other options are not happening quick enough. What if …. people just quit driving altogether?
I guess what I’m trying to say is there are only so many things you actually control with regards to inflation. Complaining about what companies charge for materials when they are subject to the same inflationary pressures as you are doesn’t help. Before you complain about inflation, you need to get “your own house” in order. In reality, everyone who has bought something new and not needed in the last year is responsible for todays’ inflation. When you put high demands on depressed industries (like oil and housing), you’re going to pay more. And in more ways than one, everyone can do their part/s to get it back under control by spending only on needs versus wants, paring back their use of the higher-priced commodities, and/or by shopping competetively. Stop spending!
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