Inflation is defined as a general rise in prices, as opposed to an increase in a single item. The economy is complex. For various reasons such as demand, fashion, weather, wars, accidents, politics and so on, some individual commodities will rise in price while others decline. When they are all rising, that’s a sign of a broad factor affecting everything in the economy.
If you are familiar with economic news, you should know that headlines about supply and demand shocks are common. In the majority of hurricane seasons, there is news of oil platforms or gas pipelines going offline in the Gulf of Mexico. Sometimes there are temporary spikes in price, but they quickly fade.
Lately, commodity prices (and used car prices) are surging and in each case, there’s some localized explanation. Semiconductor shortages for cars. A cold snap in Brazil for coffee. Except they don’t stay local. They are the first domino that triggers a wave of shortages across all industries. Here is an example from the United Kingdom. Surging natural gas prices caused a shutdown in UK fertilizer plants. This caused a shortage in carbon dioxide produced as a by-product, used in the food industry for cooling and fizzy drinks. There is supply available, but at a cost.
The question is why are there shortages? The virus is blamed, but at this point, the answer is inflation. There aren’t shortages in the economy. There is excess demand created by governments and central banks around the world. Money wasn’t distrubuted naturally, as it is in the economy. It was given to specific industries or spread generally. This changed the pattern of demand in the economy. Highly complex and fragile supply chains damaged by government lockdowns were hit by a demand shock they were ill prepared for.
Every inflation evetually ends. Either the policymakers stop it as Volcker did in ther late 1970s and early 1980s, resulting in a deflationary recession. Or, if it never ends, eevntually the currency is destroyed, rendering further inflation impossible.
The world is sitting on the inflation launch pad now. China has a significant economic slowdown in progress, one that has tipped Evergrande into bankruptcy. The U.S. stock market bubble looks like it might finally be over. China says it doesn’t want big stimulus plans and moderate Democrats have killed the big stimulus bill in Congress. If central bankers follow through with their taper rhetoric, it appears a volunatary abandonment of inflationay policies is underway. If they instead panic during the inevitable deflationary fallout, then expect prices to explode higher as investors shift their capital out of financial assets and into commodities.
The Federal Reserve’s Federal Open Market Committee is meeting today and tomorrow. A policy announcement will be made tomorrow. According to a leak, they should announce a taper is on the table for November.