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Economy: A period of hyperinflation imminent?

Hugo Lirette

Economy: A period of hyperinflation imminent?

In the last 12 months, prices in America have risen by 6.2%, the largest price increase since November 1990. The worst part is that there seems to be no end to this price increase. The following are several examples of price increases over the past year. 

In Quebec, from August 2020 to August 2021, the price of food went up. For example, the price of eggs increased by 8.7%, the price of butter increased by 11.1%, the price of oils increased by 68%, the price of cereals increased by 31%, the price of sugar increased by 48%, etc. 

Otherwise, as shown in the following graph, the price of regular gasoline has skyrocketed. Indeed, it has almost doubled since its lowest short-term price recorded in April 2020 and has risen from around 0.85$/L to 1.49$/L. 

Figure 1: Monthly average price of regular gasoline at the pump.

Since the start of the pandemic, house prices have increased by about 25% and by about 200% over the past 16 years according to the Canadian Real Estate Association.

Also of interest, the rate of increase in the price of goods and services is outpacing average wage increases. This is bad news since it means that a worker is earning less than he or she was. This is demonstrated by the following graph offered by CNBC.

Figure 2: Comparison of inflation and wage growth.

With all of this in mind, the question arises: how much worse can it get?

What is inflation?

In an economic market, the prices of goods and services vary over time. Some go up, some go down. This is normal; it is the result of supply and demand. Inflation is when prices increase overall, not just the prices of a few goods and services. In effect, inflation is a persistent increase in the average price level over time. These prices include everything a consumer can buy: food, houses, cars, clothing, gasoline, etc. It can also be seen as the decline in the purchasing power of a currency over a while. Prices rise, but wages and the monetary value of the currency remain relatively stable. 

In small doses, inflation is considered healthy for the financial market. However, when it starts to disintegrate, the purchasing power of the currency and wage increases cannot maintain proportional levels, it is a problem. 

How is inflation measured? 

The answer to this question is provided by the Consumer Price Index (CPI). This represents price changes as experienced by consumers. The index measures price change by comparing, over time, the cost of a fixed basket of goods and services. The goods and services in the CPI basket are divided into eight major components: food, shelter, household operations, household furnishings and equipment, clothing and footwear, transportation, health and personal care, recreation, education and reading, and alcoholic beverages, tobacco and recreational cannabis. The annual inflation rate is obtained by comparing the total price of the basket in a given month with the price in the same month of the previous year. Note that the most popular calculation uses a 12-months period. 

Inflation over time

It is interesting to compare the cost of living today to the cost of living in the 1970s. Most of today’s parents and grandparents have experienced a different reality concerning the price of goods and services. The following figure compares the cost of several goods and services between 1975 and 2015.

Figure 3: Comparison of the cost of living in the United States between 1975 and 2015.

Please note that all prices in this section are in US dollars. 

At the time, a house cost around $48,000. Today, it is very difficult to find a house under $250,000. The minimum wage was $2.10/hr in 1975. In 2015, it went up to $8.25/hr. This is a 302% change. Another example is tuition which has changed from $3776 to $42,419. This is a 1023% change. It is fascinating to note the non-proportionality of the price changes (302 vs 1023%). This indicates, in this case, that tuition is much more expensive than it was. 

Now, here is a graph of inflation over time.

Figure 4: Evolution of inflation from 1914 to today.

Since 1914, there have been several periods with excessively high inflation rates. The highest inflation rate ever recorded in the United States was 23.70% in 1920. This was the period following World War I. The war created large costs and rapid production of supplies. Also, the shortage of resources caused prices to rise. When supply decreases and demand remains the same, prices increase. All these factors combined drive inflation to this monstrous level. Following this period, the United States is experiencing a period of deflation. Deflation is essentially the opposite of inflation. It is the general decline in the prices of goods and services. 

Then comes the Second World War. In 1942, the Stabilization Act was introduced to prevent inflation. Wages were frozen, prices were controlled, and several other measures were put in place to ensure that companies did not have to raise wages. Once again, the great expenses of the war did not spare the price of goods and services.  

It should be noted that during the period from 1900 to about 1960, there were periods of great inflation as well as periods of great deflation. These balanced out the prices and, in the end, this amounts to an average annual rate of about 1% per year. 

Finally, comes the period around 1970 to 1975 when inflation is around 12.5%. In 1974, the American government withdraws the “Gold Standard”. This is a monetary system that ties a country’s currency directly to gold. 

For the past 25 years, central banks and the U.S. Federal Reserve have kept a close eye on inflation. The Federal Reserve has an inflation target of about 2% per year and adjusts its monetary policy if prices are rising too quickly. The achievement of the target can be seen on the graph. In the last year, there has been a large increase in the inflation rate.

What causes inflation?

There are many reasons why the prices of goods and services are rising. The following is a non-exhaustive list of causes of inflation. First, prices rise when there is a lot of demand but not enough supply. Another situation that causes inflation is when there is an increase in raw material, labour, and transportation costs. Companies have no choice but to increase prices or decrease the quality and/or quantity. Also, if the demand for a product or service increases very quickly and the supply remains the same, prices may increase. Alternatively, supply bottlenecks are another inflation factor. For example, many businesses depend on imports. If the products don’t get there as much, they are not able to produce as much as they are normally able to produce.

Another form of inflation: “Shadow inflation”

Many companies are facing higher costs for raw materials, labour, and transportation. To cope with this, some companies directly increase the prices of their products and services. At this point, customers have three choices: either they decide to accept the price increase, or they decide to look for the same product from a competitor, or they decide that they can do without the product and stop buying it. Increasing product prices is not necessarily the most popular option. In fact, many companies decide to do “shadow inflation”. This is the practice of subtly passing on all these cost increases to consumers by keeping the same prices but decreasing the quantity or amount of goods or services offered. The following are examples of “shrinkflation” and deceptive packaging, that is, the process by which items decrease in size or quantity, or sometimes even in reformulation or quality, while their prices remain the same or increase.

Figure 5: Examples of shrinkflation and misleading packaging.

What is the current situation?

The Covid-19 pandemic is hitting the economy hard. Governments are forced to print and distribute money in industrial quantities to keep the economy going. When it comes to printing money, it simply means that the Federal Reserve increases the amount of money in circulation. Almost 1/5 of all U.S. money in circulation has been printed in the last year. The Federal Reserve believes that the increase in inflation is temporary and that things will return to normal in the short to medium term. Others believe that the large increase in inflation is due to indiscriminate printing by the government, and that a period of hyperinflation is imminent.

What is hyperinflation?

It is a term economists use to describe a period of extremely high inflation. The term describes rapid, excessive and out-of-control general price increases in an economy.

How do you deal with inflation as an investor?

As an investor, you need to be prepared for many situations. Here are three suggestions for dealing with what’s coming. First, make sure you have a diversified portfolio and own investments that tend to perform well in times of inflation. Another tip is to invest for the long term in solid companies. Finally, it’s important to spend wisely and track your expenses.


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