Influencers of Temporary Inflation

Hi, I'm Dr. Dave Kohl, professor emeritus, Agricultural Economics, and Academic Hall of Famer from Virginia Tech, Blacksburg, Virginia. The big question of the day is, is this inflation temporary or is it permanent? This is the most common question I'm asked on webcasts, now back in person events. And one of the things is if we look at inflation, everybody's talking about it, all the way from Wall Street to the local convenience store. Think about this, corn is up 106%, lumber, 275%, copper, 99%, oil, 102%, and even candy bars are up 15%. Why are we seeing this temporary inflation?

First of all, China. China is rebuilding its protein complex. And also China was one of the first to come out of the pandemic. Second of all is stimulus checks. Think about this, 14% of the world economy, which is about 85 trillion, was a check written by government to its people. And of course, many of these folks are now starting to spend the stimulus checks. Of course, we have the central bank here, our Federal Reserve, with accommodative action, but we also have central banks around the world doing the same thing. This combined with unemployment benefits being stretched out and the consumer spending is creating this temporary inflation.
 
Now, whether it's temporary or permanent, we're going to have to watch a couple of things. First of all, watch consumer sentiment. This report comes out each month from the University of Michigan. And if that stays above 90 for six or eight months, then we could be leaning toward more permanent inflation. The second element, this one is inside the Federal Reserve, it's called money velocity or M2. Believe it or not, the money velocity is almost twice the amount that it was in the 1970s when we had an inflationary environment. So if this money velocity stays high, then we're more likely to have permanent inflation. Then the final one is watch our unemployment rates. If they go back to the 4% range, then we will have a more likelihood of permanent inflation.

Right now, it's too early to tell whether we are temporary or permanent inflation, but it's one of those elements that any manager or lender out there, we've got to keep our eye on. We'll see you the next time for another edition of Business and Economics.