Covid was a shock to the economic system that has created a significant and dysfunctional imbalance between demand and supply. In a growth at all costs world, cheap debt is critical to consumer confidence. In this world where supply is limited, growth doesn’t mean innovation or more goods and services. Growth is channeling capital into existing goods and services thereby creating a unsustainable inflationary economy.
There is no doubt that we face a generalised increase in the prices of goods and services. Inflation is a decrease in the purchasing power of money. We need more of it to buy the things we need and want. We can pretend the system is ok and everything is fine. We can shop as usual but it is broken and until it’s fixed, inflation will continue to worsen the imbalance in the underlying system…
In an ideal world, demand matches perfectly the supply of the goods and services available. We know that nothing is perfect, so the system operates imperfectly, increasing or decreasing supply according to feedback and demand. These adjustments take time. Training people to become doctors, psychologists, nurses, builders is a lengthy process and a slow correcting principle.
Immigration on the other hand allows for our economic system to take more immediate action to respond to skill shortages and sudden changes in demand and supply. This supply principle can be adjusted to have immediate effect when needed. When immigration is not an option, we cannot use it to increase supply and therefore this system imbalance goes unchecked.
Flow is effected when the movement of goods is impeded thereby decreasing the available supply and subsequently having a inflationary pressure on price. If there are less boats and less containers, buying space to transport goods costs more and less goods arrive. If it costs more to transport goods, there’s less of them, and not enough to meet supply. Chances are these goods will go up in price.
Higher spending driven by cheap debt hits lack of supply head on, further increasing prices. Consumers feeling over confident and seeking security, target property, begin to take on more risk and further imbalance the system. House prices skyrocket. Equally, if houses cost to much to buy, people can’t holiday, and debt is cheap, renovation demand increases substantially. Builders and architects get busy, and demand for limited building supplies increases. Thereby the cost of building increases.
The workforce, having had a major covid reality check in regards to work life balance, realise that life is too short. They also notice that their cost of living is rising substantially. Perhaps they notice that they are more important in the businesses where they work, as some staff have left and finding new staff is difficult. All in all they want and need to be paid more. Hello wage inflation.
Businesses facing higher wages, difficulties in getting goods and higher supply costs, have no choice but to increase the price of goods and services. In some cases, these businesses will not be able to operate as their environment becomes unsustainable, resulting in job losses. This free’s up the labour supply, drives further consolidation into stronger business units. Around and around we go…
We live in a dynamic world of rising costs and increasing inequality. There will be winners and losers. Inflationary pressure will become more extreme until the system can calm down and a manageable balance can be restored. The system received a massive shock and it is hurting. It desperately needs to restore the flow of goods and services.
It’s not business as usual. There are limitations as to how much longer this can go on. While we work with reduced supply, we must reduce our consumption. There is a saying by Martin Luther King “if you can’t run then walk.”