Why Inflation May Be With Us a Long Time

Apple Podcast Spotify Google Podcast

Join the Money Matters Email List

Receive email alerts any time a new podcast episode is released!


Why Inflation May Be With Us a Long Time

For the last few months, it has appeared that inflation has been trending down, but it may not feel like it. Remember, just because there is less inflation does not mean that most prices are going down. It just means they are increasing at a slower pace. This morning, we got a report on inflation that surprised the market. The numbers weren’t quite as good as expected, and the most concerning was that the move in prices from December to January actually showed a slight increase in inflation – 4.8% on core prices if that increase was annualized. The market generally believes that inflation is under control and on its way back toward its target of 2%, and maybe it is in the short term. But today’s episode of Money Matters is going to focus on why I think inflation might look a little more like whack-a-mole over the next few years. We may think we have it beat, only to find that it crops up again in spurts, or maybe it even remains at a level that is too high for most American’s comfort. You know, we got spoiled with extremely low inflation rates in the 90’s and this lasted really all the way until the beginning of the pandemic. All of us know that inflation came roaring back in 2020. Many Americans saw the detrimental effects of inflation for the first time firsthand. Others who’ve been around for a while had memories of the 70’s and early 80’s when inflation was out of control. I have six reasons I’m going to share why I think inflation will average greater than the Fed’s target of 2% for the next several years. Again, there may be periods of time where it gets down to 2% or lower, but I believe that it will return to levels higher than that, on average.

Reason #1 – A lower labor participation rate. What is this rate? It is the percentage of the population that is working or actively looking for work.  The current labor participation rate of 62.5% is still down from where it was prior to the pandemic and way down compared to the early 2000’s. Why is this the case? I’ll look to a 2022 US Chamber Survey to give you some insights. First of all, several people on the verge of retirement went ahead and pulled the trigger when the pandemic hit – an additional 3 million of them. 25% of non-working respondents to the chamber survey said that government aid packages during the pandemic removed incentive for them to work. Lastly, women have not come back into the job force in the same numbers as prior to the pandemic. Many in the survey cited a lack of childcare available. So, we don’t have as many people in the workforce as we once did, and this is inflationary.

Reason #2 – An aging workforce. A record number of people are turning 65. Next year there will be even more. This higher group of 65-year-old won’t start to wane until 2027. The biggest crest of baby boomers are all now at retirement age. Many of them are still working, but their eventual exit from the workforce will put even more pressure on inflation, because there are fewer young people to replace them. The birth rate in the U.S has been falling since the late 1950’s. According to The Hill, the peak rate during the baby boom was 3.7 births per woman at that time. We are now down to 1.66 – which is even lower than the replacement rate for a husband and wife to “replace” themselves” with two kids in the population. What has helped the US stem this demographic tide thus far leads us to the next reason inflation may be with us for the foreseeable future – immigration.

Reason #3 – Tighter standards for immigration. Both sides of the aisle seem to be committed in various ways to reforming immigration. Regardless of your stance on the topic, immigration in the last 30 years was a primary factor contributing to low or no inflation because of their participation in the labor force. There are plenty of job openings today, but for one reason or another, there are many unemployed who don’t want to fill them. In the construction, agricultural and trade industries in particular, were it not for immigrants, we would not have been able to build the houses and produce the food that we have over the last several decades. This is in the process of changing, and it is going to become inflationary.

Reason #4 – Green initiatives. Now this is not a statement for or against green initiatives. Regardless of where you land on that topic, it is a fact that green initiatives have a cost. Compliance with green regulation, subsidization of non-profitable green business lines, these all increase the costs and are inflationary. Enough said about that.

Reason #5 – Increasing regulations. I’m in a highly regulated industry as a banker, and I welcome smart and succinct regulation. But both parties have seemed to have an eye on increasing the size and role of government. Some may argue that there are benefits to doing so and they may be right – but there are also costs. The more regulations you have, the greater the cost of doing business. Those businesses will then pass on those increased costs to their consumers, and this is inflationary.

Reason #6 – A change from globalization to nationalization. When there are more places in the world you can make your goods or staff your services, competition helps keep a lid on prices. This globalization trend has been in place since the 80’s, but it is reversing. Businesses throughout the world realized how dependent they were on other countries during the pandemic, and they have vowed to be more vertically integrated, having their suppliers as close to home as possible. This trend reversal may be good for creating jobs for Americans, but it is not good in keeping prices lower. Less competition is inflationary, and unless something changes, that is what we are likely to see in the future.

There is one thing that can counteract all of these inflationary forces – productivity. Artificial intelligence is being hailed in some circles as the savior that will keep inflation in check. I don’t know what the role of artificial intelligence will be, but I do think that we can still thrive in an inflationary environment if we can get more efficient.

So let’s say that inflation averages 3-4% over the next 10 years – what does that mean for you? If you are a small business owner, watch your costs and make sure you are charging enough to cover them. A small business may think they are doing well because their revenues are growing, but you may be losing money and not even realize it. Secondly, look for productivity enhancements. This may include technology, but it might also be workflows and procedures with your team that can help them be more efficient. If inflation is the old new normal – we’re going to have to adapt to stay in business.

MBC/Foundation bank can help your small business not just by giving you money, but by giving the kind of perspective you hear on this podcast tailored to the unique challenges your business is facing. Start your financial conversation with us today by exploring our website or visitng your local branch. If you’ve found this podcast to be a good use of your time, we hope you’ll subscribe to it in your favorite podcast app and share it on social media. And until our next episode, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on February 13, 2024. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. Any rates mentioned are subject to change and are accurate as of the recording date. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.