Inflation in 2022 and Beyond

Updated: Jan 24

It wasn’t that long ago the Federal Reserve was trying to convince us inflation was transitory. Today they no longer sing that tune, and instead the narrative has turned to the number of rate hikes we can expect to see in 2022. The Fed has notoriously been months behind in matching their inflation guidance with reality, so you might want to seek alternative sources. Here are some of our thoughts...


If we use the CPI as a gauge of inflation, then BLS.gov tells us inflation was 7% in 2021. Perhaps a more telling indicator of what happened to prices, however, is the Producer Price Index (PPI) which was up 9.7% in 2021. In a perfect world these numbers would be very close to each other, but producers so far have been accepting squeezed margins in hopes that the Fed's “transitory” narrative was real. It isn’t possible for producers to in perpetuity have their input costs grow by 2.7% more than what they charge their customers, so we can expect more price changes ahead.


The story doesn’t stop there. Changes in how the CPI is measured have dampened its ability to measure the actual cost changes for Americans to keep their quality of life. Shadowstat’s alternate measurement of inflation, which attempts to calculate price increases the same way the BLS did in earlier decades, shows that in 2021 prices may have increased a much higher 10-15%. For many of us, this level of price increase is closer to what we’ve experienced in our lives over the last 12 months.


So what is in store for 2022?


Unfortunately, the things that have caused the inflation haven’t stopped and until they do, we can expect more of the same and possibly at larger levels. No, inflation hasn’t been caused by corporations all of a sudden getting greedy and screwing the public. And while there have been large price shocks to the economy because of Covid-19, that also isn’t the cause of price changes of the magnitude we’ve seen and will see. The primary driver of price increases has been the increasing money supply which has soared to unprecedented levels. M1, a popular measure of the size of the money supply has quintupled since early 2020. Unfortunately, a few rate hikes to get the fed funds rate from zero to 1.5% won't even be close to enough to slay the inflation dragon. It may take an effort the size of what Paul Volcker's Fed did in the early 1980s - if anyone today is bold enough to try it.


So what is a business owner to do? All of our previous advice on the topic still applies. The purpose of this post is to show that the reason for heeding that advice hasn’t gone away. Instead it has become even more important to pay attention as we enter another year of large price increases.