Dr. Rick Franza, is the Dean of the Hull College of Business who discusses a different, timely business topic each Monday in this column. This week, take a look at the impact of the highest inflation in four decades. The interview has been edited for clarity and impact.
ABD: The inflation rate is currently nearly 7.5 percent, the highest it’s been in 40 years. What is causing that?
Rick: I’m not an economist, I’ll start with that caveat, but much of what’s caused the inflation is cheap money. We have too much money out there and that drives up inflation. That’s why the normal response to inflation is to raise interest rates. It cools down the economy.
There is also a supply and demand issue. Inflation will go up if the demand for certain items has gone up but the supply isn’t there. When the supply is below the demand and things are scarce, they have more value and that raises the prices. So it’s a supply-demand mismatch. That’s stuffed up the supply chain.
ABD: Did the response to covid play a role in this?
Rick: A lot of companies misjudged the impact of covid on the economy. They thought the demand would go down and they started reducing production because they didn’t want to be stuck with inventory. But the demand didn’t go down as much as they thought. So that ripples down through the entire supply chain.
The omicron variant wasn’t as bad as delta, but it caused a lot of absences in the work place. The increase in absenteeism exacerbated the labor shortages. Plus the government was paying people more than they could get going to work. There’s a hangover effect from that. It takes more money to get people back to work.
ABD: The Federal Reserve seems poised to raise the interest rates a bit this month. How will that affect things?
Rick: Overall it’s a plus because we get a normalization of rates. But if you increase interest rates the bill on the country’s debt goes up. They’re going to have to thread a needle at the Fed but interest rates have to go up.
It’ll take a while for the Fed interest rates to take effect because they can’t raise it more than a half percent at a time without tilting the system. It now looks like they’re going to raise it a quarter percent in March and maybe another quarter percent in June. They’re not going to move too quickly. If you’re looking to buy a house, soon would be the time to do it because interest rates probably won’t come down for two years, and they may have to go up from there.
ABD: People have talked about more manufacturing taking place in the United States. Would that help the inflation rate?
Rick: It’s a mixed bag. You’re less likely to be held hostage by another country. It’s also cheaper to move stuff within the United States. But you can’t make up the labor price difference from the stuff we get from China.
ABD: What do things look like in regard to inflation moving forward?
Rick: I don’t have a lot of data to support this, but it seems the supply chain is getting better. The government has tried to help out at the ports. The only things the government can really affect are the ports, trucks, the transportation issues. I don’t see them doing anything with opening up oil production here. And there’s still the money supply issue.
The rest is organic to the companies making a better matchup of supply and demand. More people will be going back to work. But all bets are off if we get another covid variant.