Why Is Inflation So Stubborn?

Many are beginning to wonder when all of the problems with inflation will end. Even though the CPI increases seem to have turned a sort of corner with October’s rate, why are we still having these problems and when can we expect them to end?

There are three basic answers.

Stimulus Money

At the beginning of the pandemic, the government pushed out unprecedented amounts of stimulus money in both the corporate and private sectors, trying to keep the economy rolling. By the end of 2020, taxpayers had an additional $2.3T sitting in the savings accounts.

While people are spending that money through the economic downturn and the interest rate increases, $1.7T of the additional savings still exists. With people continuing to spend their additional savings, inflation remains high given the scarcity of goods and supply chain problems.

Labor Markets

Companies need to produce the additional goods and services given those increases in demand. As such, they are continuing to hire people which has become an almost endless cycle.

In order to hire people, employers have had to raise wages. Even employers who aren’t hiring have been forced to increase their wages to maintain their staffing levels.

This increased money supply is continuing to increase demand for goods and services. This in turn creates inflation.

Of course, given inflation, workers need raises to pay for those basic goods and services. It’s an almost endless cycle in both directions.

Moving Target

The Federal Reserve Bank has had difficulties knowing how to combat the problem, given the fact that the targets continue to move. At the beginning of the problem it was groceries that skyrocketed in price.

Cars were next given the supply chain problems. Then it was gasoline and energy prices as a whole.

Now it’s airline prices and housing. These moving targets have most of the government at a loss on how to combat the problem.

Let me leave you with this.

The Fed’s move to increase interest rates by 3.75% in nine months is unprecedented given the speed at which the increases have come. Their actions in the prior four economic downtours have been much slower.

It took somewhere between 2 and 3 years in those cycles, for the Fed to increase rates by that same 3.75%. They’ve decided, given the current inflationary nightmare, that they don’t have the time to slowly ramp up the rates.

This begs the question of when will it end? Many are predicting that any recessionary period will be short; more of a light bounce then anything else.

But when you think about all of that extra money still sitting in savings accounts, the increased spending that results, and the labor markets feeding on themselves, how could it possibly be a light bounce?

Nobel winning economist Milton Friedman famously said that the American economy normally takes at least three to four years before it responds positively to any set of interest rate hikes. So much for a quick correction.

That being said, I had lunch over the weekend with one of my close friends in the money management business. Our conversation lasted for hours, as they thankfully and normally do. I learn a lot from him.

Somewhere in the middle, I was talking about how many of my clients are sitting with large amounts of money in their checking accounts given the pandemic relief of the past couple of years. We’ve been extremely successful in getting PPP Loans forgiven and Employee Retention Credit money for most of them.

I lamented that most of those clients aren’t actually doing anything with that money. He asked why?

In today’s technology world where it’s pathetically easy to open a trading account, why not just dump it in something easy, safe, and boring like a bond fund? At least grow that money somewhat so that you’re not getting eaten alive by inflation.

But sadly most entrepreneurs don’t. And in doing so, they resign themselves to a middle class prison.

We’re all good at taking risks. That’s what we do as Entrepreneurs. But many of us are only good at risk taking when we’re in charge of that risk.

Putting your money in the investment markets means that you’re out of control, which is hard for many. But it’s a skill we all need to learn.

For without it, you’ll only be able to make money off your own efforts which are limited.

I liken entrepreneuring to being a father in many respects. It seems like I never have the right skill set for the current challenges.

When my daughter was two, she needed a particular skill set, which I worked on and acquired by the time she was four. At that point she needed something else, and I was still behind. In many ways, it continues to this day.

The skill set I needed when I had a $200K practice was completely different from what I needed when it was $500K. Now that it’s over $2M, I need different skills as we continue to grow.

But, if looked at properly, that is the beauty of what we do. Every day is different with something new to learn.

If you continue to run your business like a $500K business, when it becomes a $700K, it might just go back to its smaller size. Learn to handle the finance side of your business. Do something with that money.

I’m not saying that you should do anything risky but I’m also not saying that you should be scared so stiff that you do nothing. If handled correctly, you could always get it back into that checking account in a few short days if you really need it.

Learn how to farm money. I’ve learned that it’s the literal difference between being in the middle or the upper class.

We’re all going to get through this. Let’s get through it together.

Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Employee Retention Credits, M&A Due Diligence, Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,

Sincerely yours,

Chris Amundson
Accounting Solutions Ltd.



Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.