Janet Yellen insists inflation is not something we need to be terribly concerned about. Yet it has been on my mind quite a bit lately. Perhaps it should be on yours, as well.
In the interest of full disclosure, it should be noted that my understanding of the economy’s inner workings hardly compares with that of our current Treasury secretary. After all, she earned a Ph.D. in Economics from Yale. I took a couple of Econ classes as an undergraduate. So there’s that.
Still, while being super smart and having unmatched access to relevant data instills a certain advantage, it doesn’t preclude incorrect conclusions from being drawn. Just ask any meteorologist.
Nor am I the only person worried about the possibility of a rapid uptick in inflation. Another is former Treasury Secretary Larry Summers. His Ph.D. is from Harvard, by the way. Summers recently warned that the ongoing explosion of federal spending tied to the most recent COVID-19 relief package could indeed prompt an inflationary uptick.
So what, you say? What does this have to do with running a long-term care facility? It’s a good question. Here’s a good answer: A lot.
In a nutshell, the problem with an unusually high inflation rate (say, above 3%) is that it dramatically drives up the cost of doing business. That renovation project you priced a year ago at $15 million? Well now it might be closer to $25 million. The supplies for patients that were going to cost $100,000. Better add another $50,000. And so it goes.
High inflation can also dramatically eat into investments and the organization’s fiscal reserves. It’s like a tax that delivers nothing in return.
To be sure, moderate inflation is generally good for the economy — and your business. That’s one reason why the Fed likes to keep it around 2% a year. But as many of us have learned by eating chocolate, ice cream and White Castle hamburgers, too much of a good thing can lead to bad things.
Clearly, some troubling drivers are at play, at least as far as inflationary catalysts are concerned.
One is the aforementioned uptick in federal spending related to COVID-19 relief. And then there’s the Biden administration’s infrastructure proposal, which will likely cost taxpayers somewhere between $800 billion and $3 trillion.
We are also seeing tremendous wage-hikes pressures. Throw in lawmakers on both sides disinclined to address deficit spending, and a widespread sentiment among the Central banks that inflation is not a biggie, and here is the all-but-inevitable result:
A ton of new cash in circulation.
And as even those of us with a mere state-school education can attest, too much money chasing too few goods is the standard recipe for hyperinflation. That’s the kind we saw in the late 1970s, when a 10% loan was considered a great bargain.
Already some troubling signs are apparent in grocery stores and lumber yards, where double- and triple-digit price hikes are increasingly common.
Yellen insists the Treasury Department has plenty of tools at its disposal to keep inflation rates in check. Maybe she’s right.
But what if she’s not?
John O’Connor is Editorial Director for McKnight’s.