Inflation: Ouija Board Or Clear Signs Ahead?

The topic of inflation has been on most Americans’ minds for the past many months. Just when it seemed like the U.S. economy was running at full strength, the COVID-19 pandemic struck, setting product imports, exports and consumers purchases, into a tailspin, decimating the supply chain, stagnating construction projects and putting purchases of cars, trucks, furniture and other manufactured goods on hold for a year or more.

Then, just when it seemed we were emerging from the pandemic and getting employment, production and the overall economy back on truck, Russian President Vladimir Putin decided to attack Ukraine, upending virtually the entire world’s economy. The tens of thousands of Ukrainian lives already lost mortify me far more than the effect of the war on my wallet, but the topic today is inflation, so I’ll reserve my political and moral rant for another forum.

The March/April issue of TFM (The Financial Manager), the publication for members of the Media Financial Management Association for which I serve as president-CEO, includes an incredibly well-researched feature story from Martin K. Holdrich, senior economist at Woods & Poole Economics, titled “Glass Half Full?” In a rather prescient way, the article presents scenarios and reasons for and an historical review of recent past and current issues around inflation.

In his article, Holdrich begins with some basic facts around inflation, adding interesting tidbits along the way. He reminds us that periods of sharp inflation have taken place in the U.S. throughout our history, but that they primarily occur over relatively short periods of time. These inflationary periods tend to ebb and flow, and typically last for months rather than years.

He’s more concerned about longer-running, destructive inflation, like the one that took place between 1973 and 1982. Since 1984, however, the U.S. has experienced relatively little inflation, stable prices, strong economic growth, and increases in personal and corporate wealth.

Holdrich points to three key indicators of inflation — all which have historically been the result of what he calls “external traumas to the economy” — and this is where my reference to “prescient” comes in:  the first marker he mentions is war, which he says was the most common cause of both inflation and deflation during the industrial age. The other key inflation indicators are shortage of critical goods such as oil and; and, as he noted, “apparently, pandemics, which disrupt economic activity by snarling supply chains and prompting governments to engage in policies that may affect price levels.”

I reached out to Holdrich, assuming he couldn’t have predicted the war in Ukraine prior to his writing his TFM article several months back, and I wanted to find out if he had some amended thoughts on the topic. My observation is that the war in Ukraine is exacerbating the inflationary spiral, particularly when it comes to global energy prices.

I read an AP story last week reporting inflation at 8.5%, with energy prices being a major contributor to that figure. This is the highest inflation rate since 1981 and lends credence to the view that the Fed will raise rates by a half-point instead of the expected quarter point.

This also means that instead of tapping the breaks to slow down inflation, the Fed may need to hit them a little harder and risk a recession by doing so. Many economists, however — including respected macroeconomist Diane Swonk, one of the keynoters of MFM’s upcoming Annual Conference — have said the next recession doesn’t have to be disastrous. If done correctly, it can essentially serve as a cooling down period for the economy and allow it to catch up to the post-COVID recovery (much of which was fueled by the abundance of free money the Fed has been injecting into the economy since the 2008 recession). How the war impacts all of this, however, is a wild card.

Holdrich seems to agree with my premise. He, too, mentioned the March 8.5% inflation rate, adding that the war has increased global inflation — and inflation in the U.S. — by upping both energy and food prices through reducing Ukraine’s economic output by sharply curtailing its capacity, and constraining Russia’s output as a result of worldwide sanctions. The supply reductions in both Ukraine and Russia will certainly increase prices in the U.S. and globally, he believes.

He looks back to the 1970s, noting that unlike the runaway gas prices caused by OPEC-led petroleum output cuts — which were externally imposed and separate from market forces — current increases could be abated quickly as alternate supply sources and delivery routes are brought online. “The war in Ukraine may simply shift consumer energy relationships: countries aligned with Russia may buy more Russian oil, freeing oil supplies so that countries previously buying Russian oil have alternative sources,” Holdrich told me. “It may be that the only long-term impact on prices from the war in Ukraine will be more expensive delivery systems to work around the consumption of Russian oil.”

We may not want to exude any sighs of relief quite yet, however: Even if the war in Ukraine is shut down and no other wars begin, Holdrich still has some concerns around inflation. If the energy markets currently disrupted by the war aren’t able to stabilize relatively quickly, and energy prices continue to creep upward for an extended period, expectations by Americans that the country is “officially” in an inflationary period might become ingrained — and a reality, which could trigger an intense recession.

Martin explains in his TFM article the reasons why, even prior to the war, inflation seemed to be broader than economic conditions would dictate. For one, firms and workers with newfound market leverage began extracting some marginal, opportunistic price increases and wage gains because inflation was starting to be considered by many to be widespread. But even this “opportunistic inflation” is not cause for alarm, Holdrich believes.

His final thought for me was that even with the war in Ukraine, he and other economists expect a relatively swift end to the current inflationary situation. Based on history, it’s not likely current inflation will continue throughout the 2020s and lead to inflationary expectations that need to be halted with decreased demand. “The causes of the current inflation are logical, solvable — and within the control of households, business, and government policymakers,” he reiterated. The dark side of persistent inflationary expectations notwithstanding, Holdrich still expect a positive outcome from the pandemic and, ultimately, a stable, growing United States economy. His full article is well worth the read.

You won’t want to miss Diane Swonk and top-tier luminaries from the media industry headlining our annual Media Finance Focus conference. If you want to stay abreast of a plethora of media issues, plan to join us May 23-25 in Tampa, Fla. “Blue Skies Ahead” offers informative sessions, distinguished keynote speakers, interactive industry roundtables, networking events, and an exhibit hall showcasing the latest industry products and services.

Joe Annotti is president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. He can be reached at [email protected] and via the association’s LinkedIn, Facebook, Instagram and Twitter accounts.