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Why is Inflation Bad?

Last updated on May 3, 2023

The prices for products are increasing! That is inflation!

Last week, the CPI for the quarter came out.  Inflation is continuing to grow at 6.4%.  This was down a little from the last read of 6.5% but it is still troublesome.  The consumer is spending money and the cost of everything is going up.   After 2-3 years of Covid lockdown and forced savings, the consumer is out and spending money.  Additionally, they are using their savings and new credit card debt to do so.  The consumer is 70% of the economy.   This inflationary cycle is being fueled by government stimulus savings and pend up demand.   You just need to look at the price of eggs or an airline ticket to see the effects of Inflation.   This is starting to price people out of products and services.  Prices tend to go up more than they come down.

Inflation is bad for several reasons.  Mainly, it increases the costs of goods that you must buy.  The decrease in buying power is a drag on the economy.  Interest rates are going up!  This means the cost to borrow money increases.  From credit cards to home loans, everything is getting more expensive to use credit.  Lastly, the job market will start to get harder to find a job.  Layoffs happen as consumers and corporations slow their spending.  Plus, higher rates slow buying homes and building factors, jobs are affected.  

Inflation is bad for the economy.  Once it starts it is very difficult to get it under control.  The FED will try to tame inflation by raising rates.   In 2022, the FED raised rates 7 times.  They also raised it once in 2023 and there are signals of more to come.   The cost of buying a home has increased substantially in 2022.  Check out this chart from The cost of buying the same home doubled in 2 years.

With the cost of everything moving higher, the consumer is buying less stuff.  Many individuals are on fixed incomes.  Social Security only adjusts once a year.  Additionally, you typically don’t get a pay raise initially when the costs of goods go up.  Prices are going up, wages aren’t.  Consumers will be forced to buy less. 

As consumers buy less, manufactures cut jobs.  There is less need for the product, so there is less need for as many workers.  Less people buying new homes, construction is down.  Less purchases of cars, tv’s, etc., less need for as many employees.    

Eventually, the cycle is broken as interest rates go higher.  The economy stalls into recession.  The forces a break in the inflationary cycle.  The FED will begin to lower rates in a recession and producers start to cut product prices to sell more goods.  The business cycle starts again.   One note, inflation is bad for the stock market as earnings expectations are cut. 

it is important to note that inflation is a complex phenomenon that can be influenced by many factors, including government policies, international trade, and natural disasters. Moreover, the relationship between inflation and interest rates is not always straightforward, as different economic conditions can affect how consumers and businesses respond to changes in borrowing costs.

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