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 Market Mysteries of the week

  What is inflation, and why are people worried about it? 

Answer: Inflation refers to an increase in prices, AKA one dollar buys less stuff.Main causes: More dollars in the system or less stuff available for the dollars out there.More dollars are flowing: - People are ready to spend again and demand is high. - The government is spending a lot more to stimulate the economy. - The Federal Reserve (central bank) is creating more money to fund everythingExamples of current pressures:Wages: Businesses are struggling to refill positions quickly enough. So they’re boosting wages to attract workers. Unemployed workers might... - Have concerns about getting sick - Not have childcare for kids still home - Need new training for the available jobs - Take more time to find the right job, given increased unemployment benefits reducing urgency & increasing flexibilityHome prices: People are ready to buy homes, but the supply is low while it takes time, people, and materials to build them.Lumber: Home builders need wood. There are plenty of cheap trees available, but manufacturers like sawmills can’t turn it into cut lumber fast enough.Oil: Global supply shortages and extreme events like the Texas freezing storms and Colonial pipeline hack have exacerbated things, while demand from travelers and businesses increases.Used Cars: Major automakers are stalling production because of computer chip shortages. New car shortages then refocus the heightened demand for cars on used cars. Used car prices are surging.Who’s worried:Some consumers. Consumers are more worried about inflation than they have been in ten years.Some investors: Investors freaked out about it for a few days this week, but then let it go. We’ll see what happens next week.Not the Federal Reserve. The Fed is in charge of our money system. They watch inflation closely, because it’s basically their job to make sure it doesn’t become a problem. The Fed says these spikes in prices are short-term issues. So as people get back to work and production picks back up, things will go back to normal.What are the risks?First off - prices are supposed to rise. Inflation is totally normal and is indicative of a healthy economy. Prices can’t really stay still, and declining prices would be bad. We wouldn’t spend if we knew things would be cheaper tomorrow. The risk is that it gets too high, too quickly. That creates instability in a lot of areas.There’s always the risk that the Fed is wrong. If inflation continues at a high rate, the Fed will likely have to take action. Action means restricting money flow and stimulus so that all this demand stops pressuring the supply. That means higher interest rates and slower growth.What should I do?Just chill for now. For long term investors, inflation concerns are pretty standard. They come and go. If there’s a serious scenario where the future of the economy and integrity of our entire monetary system is in danger, it won’t happen overnight.  

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