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Inflation, Supply, and Demand Correlation or Causation?

Hello! My name is Tyler Sindel, and I am a current graduate student at the University of Notre Dame. I am originally from Brick, New Jersey! I have an interest in the Accounting/Finance industry. I am looking to expand my knowledge as part of the Stuff Your Accountant Isn't Telling You podcast! Thank you for reading.

This blog post was written in response to the Stuff Your Accountant Isn't Telling You Episode "Why Understanding Inflation and the Supply Chain is Critical to Your Business Surviving" here.

From this podcast, I retained new information on the supply chain, inflation, and how it affects businesses and individuals. Through the last year, we have seen a surge in inflation. What are the driving forces behind this inflation? We see supply chain issues, stimulus, and supply/demand playing a role in this inflation. Here are some quick tips to help you boost your financial literacy regarding these topics!

What is Inflation?

Inflation can be simplified down to “when costs are rising faster than your net income”. When your wages are not growing as fast as your costs, you can consider being in an inflationary state. Your money doesn't buy you as many goods as it used to. For example, during the COVID-19 pandemic, $2.25 bought you a gallon of gas on average, versus now, where it costs you over $3.40 to buy a gallon of gas.

How do Supply and Demand affect inflation?

Supply and Demand is a practical economic factor when determining the prices of goods. As referenced in the podcast, when brand new shoes, such as Jordan’s, are released, there is a huge demand for this good. Unfortunately, there is only a limited supply that most likely will not be able to handle all of the demand. Therefore, people would be more willing to pay higher prices in order to secure a pair. On the other end, the old, outdated shoes lack demand, where supply trumps demand; the price will likely drop to help boost sales.

When Supply is greater than demand, prices usually tend to drop

When Demand is greater than Supply, prices usually tend to increase

"The ability to maintain healthy and heavy cash flows allows a company to navigate the dangerous waters of rising interest rates"

Supply Chain Issues Due to the Pandemic

When COVID locked down the world, we lost a great amount of supply chain logistics. Companies shut down, and people were not at work. In an economy where money was being printed (supply increase), this did not help with driving inflation down. With supply chains weakened, there would be less supply of goods that are needed. Do you remember the toilet paper shortage? This was a great example of supply chain issues. Products were not able to reach the people that needed them, which decreased supply when demand was at a high

How does fuel inflation hurt other aspects of goods and services?

While inflation in every industry or sector hurts your wallet, fuel prices drive other types of inflation. If you think about how your product gets to the destination where you can buy it, you realize fuel prices are a direct cost of producing goods. The astronomical increase in fuel prices drives inflation in other sectors or components of inflation.

Fiscal Policy: Stimulus Checks and Minimum Wage

While the stimulus checks seemed to be a necessary evil during COVID, they would, in the long run, hurt the overall economy. Artificially printing money and increasing the money supply, you drive down the value of the dollar. This can be seen as one of the main drivers of inflation since this is a direct change in the supply of dollars.

Moving on to the minimum wage increases. You are causing inflation directly and indirectly. Indirectly speaking, there is less incentive to go work certain jobs. As referenced in the podcast, companies were claiming to have a shortage of truck drivers. This would then affect the transportation of goods, lowering the supply. During COVID, you were being paid not to work, which of course, would lead us to similar issues as a shortage of truck drivers. The direct impact of minimum wage increases is that more money is in circulation among citizens. If there is more money in circulation, goods will tend to rise in price based on the fact that people are able to afford more.

Business, Supply Chain, and Inflation

As referenced in the podcast, when war broke out in Russia, companies were not able to produce oil quickly enough to meet the demand. Once the war started, you saw a huge increase in price. In a forward-looking world where clean energy is being emphasized, this war happened at a tough time. With oil production already being lower than usual due to COVID and regulations, this was a “perfect storm” to cause inflationary times in the fuel industry. As stated before, the fuel industry directly affects many other industries.

Sometimes businesses can not raise prices with the lack of supply. However, most of the time, you see these increases in prices hit your bank accounts due to companies pushing costs onto consumers. One way or another, the inflation that we are experiencing affects business owners, individuals, and most aspects of life.

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