Matt McCauley: The good, the bad and inflation

Jul. 28—The good is pretty straightforward: We appear to be winning the war on COVID-19. Of course, we have not won, but cases, hospitalizations and deaths are down considerably from this winter. All of us should be so thankful for this welcome development and, hopefully, continued trend.

The bad is there is also a bit of uncertainty about the Delta variant that is responsible for a recent uptick in cases- casting some doubt on the tremendous progress made to date and our ability to emerge fully from the COVID-19 Pandemic yet this year.

However, during this continued public health uncertainty, something somewhat familiar — yet certainly unwelcome — has crept into our recovering economy and our psyche: inflation.

Many of us have lived during times of significant inflation, meaning a general increase in consumer prices within a period of time. Inflation in the United States was relatively consistent and stable (2-3%) from World War II until the oil shock of the early 1970s, where it rose to 7%, and then again in the early 1980s when it increased to a whopping 13%. Both of these times were also marked by historical recessions.

For context, an acceptable inflation rate is considered by most economists to be about 1.5-2.5% per year, and that is about the range we have been in for over a decade until recently. The inflation rate increased to 5.4% in June, the highest since 2008.

In the last couple of months, we have all seen prices rise on 'durable goods' (e.g. autos, electronics, major appliances and sporting goods). Many believe that these rises in prices are a result of a perfect storm of temporary problems, including increased consumer demand, supply chain disruptions, labor shortages, wage increases and unprecedented government spending (specifically direct payments to consumers).

However, many economists and policymakers believe most strongly that much of the recent spike in prices has been driven largely by automobile sales. Specifically, the global shortage of semiconductors has slowed new vehicle production, thus creating tremendous demand for used vehicles. It is estimated that this demand accounted for one-third of June's increase in the Consumer Price Index, an indicator of inflation.

It's also worth noting that 2020 was the first time in many years where consumers spent more of their income on goods than services. And, concerning 'non-durable goods' (e.g., food, clothing, gas and beverages), prices have not risen near as fast as durable goods. Inflation in services, for now, has been somewhat stagnant. Therefore, another potentially temporary aspect of this most recent gain in inflation could be neutralized somewhat if or when consumer spending begins to revert to a preference for services instead of goods.

We do have experience and tolerance for combating inflation, regularly relying on the Federal Reserve to increase interest rates as needed.

However, tackling inflation by raising interest rates now will prove very difficult in a time of desired economic recovery as many consumers and businesses have grown accustomed to the historically low interest rates that have now been in place for over a decade as a response to the Great Recession of 2009.

The bottom line is that the factors contributing to recent spikes in pricing are slowing, but are not disappearing and will likely contribute to greater gains in inflation this year than anyone would like to see it.

Even if inflation significantly decreased for the second half of the year, the 2021 rate of inflation would still likely be the highest in recent memory and that should be cause for heightened concern and further inquiry to the reasons.

Matt McCauley is Chief Executive Officer of Networks Northwest.