John Phipps: This Is Your Brain On Inflation
USFR- John's World 4.16.22
The jaw-dropping inflation rates of the last 6 months have turned all those amateur epidemiologists into amateur economists. It has also finally given inflation hawks their chance to say, “Told you so!” and they did – for about the last thirty years. Inflation predictions were so wrong for so long, the real thing has flummoxed us entirely. The other problem with this abrupt price change is the number of things to blame.
The pandemic which threatened to close down entire economies, which made governments provide payments to avoid an outright depression which consumers saved more than expected which made the decline of COVID a green flag for massive pent spending on goods that could not be produced during the shutdowns which became missing links in a surprisingly fragile supply chain making many products even scarcer and harder to get to consumers because of the oil that wasn’t produced and the truckers who left for better jobs.
And of course, a war. Kinda makes me miss the old inflation when I was young where a bunch of oil producers simply cut back production and that shortage alone triggered skyrocketing prices.
Economists have long believed however, that while these series of events do create inflation, our expectations for the future sustain inflation. If we think prices will keep zooming up, out natural reaction is to buy it now at any price, making the demand pressure even greater. For that matter, if that is our view of the future, better stock up on stuff we will need, so we’ve gone from just in time to just in case.
Read more: How to Anchor Your Farm's Profits From Inflation’s Pull
With this positive feedback loop in high gear, where high prices make us anticipate even higher prices, what would have to happen to break this cycle? One thing is higher interest rates to slow spending. They look certain to be in our future. But the historic inflation killer has been a recession. This is why you are seeing more below-the-fold-stories about recession predictions. Now it could get really interesting.
If people shift the focus of their fear from inflation to recession, the resulting behavior changes could lessen the severity of inflation and the likelihood of recession. We’re struggling through unprecedented simultaneous economic and international calamities, and how we weather them will depend a lot on how we think we will weather them.
