What do you know about Flation?

Deflation, reflation, hyperinflation, stagflation or the very popular inflation.

Well, it seems that over a 40-year hiatus, inflation is back. Like Blondie’s “Call Me” or Pink Floyd’s “The Wall” - Star Wars if you are a movie person - 1980 may be with us again. If you weren’t around, inflation peaked in March 1980 at 14.8 per cent.

This year, inflation in the U.S. topped out at 9.1 per cent in June. Not quite the 80s, but still way too high to be thinking it is transitory.

(See more at: https://www.usinflationcalculator.com/inflation/historical-inflation-rates/ ).

I thought we might revisit a few points on what inflation is, how we measure it and what is done to try to fix it.

Inflation is the rate of change (increase) in the price of a basket of goods over a period of time. Simply put, it is a measure of how much the cost of stuff (food, housing, gas, etc.) is going up. Think about the last time you went to the grocery store. Inflation is basically measured by comparing the price of those goods today versus their price last year. If the price of a head of lettuce was $5 last year and it is $5.50 this year, you would have a 10 per cent increase.

Now the powers at be are constantly cooking the books on how these numbers are calculated and what is included in the “basket of goods”, mostly political reasons, but the basic trend is always there. For another look at what is “most likely happening” check out one of our favourites.

Shadow Government Statistics: http://www.shadowstats.com/alternate_data/inflation-charts.

What causes inflation? In classic economics, it would be too many dollars chasing too few goods. Basic supply-demand. If demand gets ahead of supply, then prices go up. Over the past few years, we have seen an unprecedented increase in the money supply (cash in the system) and the lowest interest rates since around 1934 (as far back as I could find reliable data). These factors increased demand for goods while COVID was causing havoc with supply.

So what do you do to slow down the inflation train? Classic moves are done by the central banks. They raise interest rates, and they remove money supply from the system. Basically, the opposite of what has been going on for the past 10-40 years. These are known as monetary policies.

An interesting little data point is that the Bank of Canada raised the overnight rate (currently at 3.75 per cent) to over 20 per cent in 1981 in their battle against inflation. Can you say ouch?!

Another tactic in this fight is fiscal policy. Governments can decrease spending and increase taxation if they want to slow things down. It may seem hard to imagine our current governments slowing down on spending, but they may have no choice. If you are the U.S. government and you owe over $30 trillion, and interest rates have just doubled, cuts in spending are going to come. Debt service is going to eat up your chequing account.

Fell free to explore the U.S. Debt Clock on this website https://www.usdebtclock.org/# Just remember to bring your airsick bag.

The consensus is that rates hikes are not over yet. I would expect another rate increase in December and in the spring.

Lastly, I found a brochure in my mother’s basement from 1979. It is called “Stretch Your Beef Dollar”, and I have attached it for reading pleasure and food budget management.

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Les Consenheim, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.