Recent data shows inflation is as high as it's been in nearly three decades, and many experts attribute it to the Federal Reserve's loose monetary policy. But that's not the only reason we're seeing such elevated inflation numbers. In this Fool Live clip, recorded on June 21, Fool.com contributor and certified financial planner Matt Frankel discusses his top five reasons for the higher inflation with Industry Focus host Jason Moser.
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Matt Frankel: Why are we seeing all this inflation? I can narrow it down to five reasons if we can go into those.
Jason Moser: Absolutely, let's do it.
Frankel: Everyone blames it on the Fed. That's reason No. 1 out of five. The Fed has the mandate to control inflation. That's one of the reasons we have the Fed, or at least the policy-making arm, the FOMC. The Fed's monetary policy is very loose and guide even more so after the COVID pandemic hit. They're doing their quantitative easing, which means they're buying bonds at a rate of a $120 billion a month to inject more capital into the system. Interest rates are at near zero levels. We had just really been in the middle of a rate-hike increase from rate-hike cycle when COVID hit and now we're back to zero. When money is cheap and they are just injecting liquidity into the system that is going to produce some inflationary pressure. That's not the only reason we're seeing inflation, so that's one. No. 2 is all the stimulus we've been seeing. This is separate from the Fed. All the CARES Act with the stimulus checks, we've had three rounds of stimulus checks now. People are about to start getting monthly checks for an increased child tax credit. The second half of the year, we had the PPP, which injected billions of dollars into the system. A lot of stimulus creating a lot of inflationary pressure. That's another thing that I'd have to call that No. 2 that people blame this on. Everyone is going out and spending their stimulus checks they're just thinking about this inflation. Jason didn't take his family to the stables and I didn't take my family to Disney World a month ago because we got stimulus checks, it's because we wanted to get out. That really brings me to No. 3, demand. Inflation is really supply-and-demand-driven when you get outside of the policy sphere. Too many people want something and there isn't enough of it, the price is going to go up.
Moser: Of course.
Frankel: If anyone has tried to book a plane ticket or a hotel in the past month or two, it got a whole lot more expensive. The reason is supply and demand. Demand has just gone through the roof lately. In a lot of ways, the reopening is tougher on the economy than shutting down because of the big spike in demand.
Moser: I'm glad you said that because I know that probably grinds someone's gears but there is some truth to that. You are right there in that when you have all of this money chasing a somewhat limited amount of goods, the impact is obvious. Now I guess then the question is, we hear this word transitory mentioned and we'll get into that. But it does make you wonder, is this something that's lasting or is it something that is just a temporary blip?
Frankel: Right. A lot of it depends on the Fed that's I guess, the most control you could have out of any of these factors.
Moser: Right.
Frankel: You can't tell people to stop taking vacations. You can't tell people to stop going to the store. But the Fed can adjust monetary policy to control inflation.
Moser: Certainly.
Frankel: Those are three. Going further, the supply chain disruptions. That's another temporary one like the transitory factors you're just mentioning. I don't know. Have you driven by any new car dealerships in the past few months?
Moser: Not where I've paid any attention, no.
Frankel: Next time you do pay attention, the big Nissan dealership near my house normally has 300 or so new cars on the lot. You know how many they have right now?
Moser: No, I don't.
Frankel: Seven.
Moser: Really, I was going to say 50 I had been way off even with that.
Frankel: The Chevy dealership near me normally has a few hundred cars. They have some trucks. Do you know how many actual cars they have like sedans? Zero.
Moser: Wow.
Frankel: There is not one new Chevy car in the Columbia, South Carolina, dealership.
Moser: Holy cow.
Frankel: That's a big supply chain disruption. That's led to used car values, which are part of inflation, really spiking. My Ford SUV that I bought two years ago is worth more now than I paid for it new.
Moser: That's just insane to even think about.
Frankel: I would go sell it to the dealership but then I have to buy another inflated car so it's a paper gain.
Moser: It's the same thing with the inflated home value. You can sell your house for twice what you bought it, that sounds great but then I got to go buy another house. Unless you know that you're going to be moving somewhere where it's just substantially lower cost of living, listen, that's a lot of work for probably not a lot of gain.
Frankel: There is a lot of supply chain disruptions going on in food service right now. You can't get chicken wings in a lot of places. That's a big supply chain thing.
Moser: It's the chicken wars.
Frankel: We went out to dinner for Father's Day with my wife wanted wings, they didn't have any and it wasn't because it was Sunday and they ran out. It was a supply chain thing. My Costco was out of wings. When I walked into Chipotle, there was a big sign that said, "Due to supply chain limitations, we're out of several items. Apologies for the inconvenience." That is driving a prices in a lot of cases. Not just the cars, that's just a really visible example, most people don't notice, but if you drive by a new car dealership, you'll see a lot of empty parking lot these days. The high-end models are going crazy, too. The Range Rover dealership near me it's right on the interstate so you can see right into it. Empty showroom there's three spots for cars. There's not one in the showroom. Not one.
Moser: That amazing.
Frankel: That's four. And No. 5, I'd say probably the more controversial of the five is wage pressure. Right now, you've probably heard there's a worker shortage. American Airlines have been canceling flights for this very reason.
Moser: I have heard.
Frankel: That's very real. The question is what's causing it.
Moser: Yeah.
Frankel: Everyone blames it on the unemployment benefit boost. But whatever the reason is, the companies especially in the food service and retail industries are really having to raise wages to compete and to get employees. I know a restaurant owner here they had to close Mondays and Tuesdays because they didn't have enough staff. He said he raised their starting wage by $3 an hour and now he has too many applications.
Moser: Well, this is supply and demand, it's economics at work. At least we know that the world hadn't gone completely crazy.
Frankel: That $3 an hour he raised it, who's going to pay for that?
Moser: Oh, yeah. I know what you mean. Someone has got to pay for it.
Frankel: Whatever the cause, there's a bunch of cause. It's not just the unemployment. A lot of parents don't have a child care and can't work right now. A lot of day cares haven't reopened since the pandemic in some places. Or they're just getting ramped back up. There is a bunch of reasons why. But the fact of the matter is companies are raising wages. Chipotle I mentioned already they just announced they're raising their prices by 5% in order to raise wages to be more competitive and get staff. There's an hour wait for burritos at the Chipotle by me because they don't have staff.
Moser: Man.
Frankel: I didn't wait there, I left. I left and just went home and ate. The wage pressure is very real and that is always passed onto the consumer. Companies cannot just take a hit to their profit margin that always rests on to the consumer.
Moser: No. But by the same token, you do see one thing to look for and it is nice to see companies that do take that longer view and maybe don't necessarily view putting it all on the consumer. Maybe stepping back a little bit and realizing that, hey, they've got a good thing going and even if we take a little bit of short-term pain in this price increase it can still ultimately work out in favor in the long run.
