The way to think about Inflation is “Time is Money”
I tweeted about three articles this week on inflation that focused on: 1) Americans are spending now, due to inflation expectations that prices will be higher in the future, 2) producers have to determine if they should raise prices or absorb inflation, and 3) a side benefit of inflation is that it could make the national debt easier to handle and manage.
If the price of a product is expected to be higher in the future, should you buy it now, based on that expectation? That is one of the trends being seen in the University of Michigan’s consumer sentiment survey. Twenty one percent of the respondents stated that it is a good time to buy durable goods, because prices won’t fall any further. That is the highest level since 1990. Also, demand for these so-called “big ticket” items are at the highest level since 2000.
Producers are facing a profits squeeze, since higher energy and labor costs are forcing them to consider price increases. In addition, due to higher interest rates driven by actions of the Federal Reserve, now borrowing costs are higher, which also add to producers’ woes. Smaller companies are facing the difficult decision to raise prices or go out of business. These companies don’t have the leverage that larger companies have to demand lower prices from their suppliers.
The National debt is another concern, because as interest rates rise, the payments on the debt also rise. However, one saving grace from this concern is that those future payments would be in dollars that would be worth less, due to inflation. This article goes on to say that, while the payments are in dollars that have less value over time, the additional interest due to higher interest rates has actually increased the total debt.
The bottom line in all of this is that, one way of thinking about inflation could be the old adage, “time is money.” This is because, due to inflation, prices of products increase in the future. So, one way of approaching this could be buy those assets now, because they will cost more in the future (think housing).