Throughout 2020, Jerome Powell (chair of the Federal Reserve) was preaching inflation numbers were "transitory".
The definition of transitory is simply, "Not permanent".
So that's fine, he's implying high inflation will not be here FOREVER. But does that mean, 5 weeks, 5 months, 5 YEARS?
Powell never clarified a target duration so use your imagination!
Many retailers chose to believe/hope (you choose) that inflation would be gone in months, not years.
This gave them two options:
- Increase prices the full amount to offset their increased expenses so they can hit their target earnings, OR:
- Absorb most of the added expenses themselves, only raising prices where they absolutely had to.
Option ONE would possibly allow them to hit their target earnings in the short term, but they also ran the risk of pushing away a large percentage of their customer base by drastically increasing prices which would ultimately hurt them in the long term.
Option TWO means short term pain for long term gain. If inflation is in fact transitory and likely to go away in under a year, they could stomach a couple bad quarters knowing they could easily make it up in the long term.
These numbers tell us that retailers have been choosing option 2.
What else have we learned? - That inflation is not "transitory".
What do we already know? - Publicly traded companies must always be earning profits.
They can no longer keep their costs down.
So, here's how the next 3-6 months are likely to play out.
- Retailers will have to drastically increase their prices even more to offset their expenses.
- People will start to buy substitute products or forego buying certain products altogether.
- This will mean less customers overall every retail company.
- Less customers means less workers are needed which means job cuts are on the horizon.
Powell has been solely focused on the unemployment numbers so if there is a moment where they decide to reverse course on the funds rate, it will be when retailers and companies in general are forced to start cutting jobs as a means to reduce their overhead.
There is not going to be an easy way out of this for the government.
Things will likely get worse before they get better so here's a couple things you can do to best prepare for potential hard times ahead:
- Trim unnecessary expenses
- Establish a budget and STICK TO IT (I say screaming into a mirror)
- Start to build a non-perishable food supply
I don't mean stockpile MREs and powdered milk like a psycho but throw an extra bag of rice and peanut butter in your closet. 👍
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