Will Prices Increase Once Businesses Reopen?

It is hard to say with any certainty, though my best guess would be no in the short run and probably in the long-run. In the short-run, say, five to 18 months, the aggregated price level will likely experience very little inflation. The long run, however, might be a different story, especially with healthcare.

Price levels should increase with the massive increase in the money supply (liquidity) and government spending. The reason that happens is that these mechanisms mainly increase the demand for goods and services. By printing money, the money ends up in wallets, and these folks now feel as if they have “extra” money to spend on things.

Though this works on paper, it’s harder to see play out in real life. It all comes down to whether individuals and firms will see these new dollars as “extra” or if they decide to save or pay off debts instead. So, it all depends on the “velocity” of money, or how quickly money exchanges in the economy. After the Financial Crisis of 2008/09, we didn’t see an uptick, despite all this liquidity in the marketplace. Granted, the Great Recession was the result of a credit crisis, not a liquidity crisis, like it was during the Great Depression. Nonetheless, banks were afraid to lend, and people were afraid to spend. 

The same thing might happen this time around. Just because businesses begin to reopen, doesn’t mean that people will all of a sudden flock to the stores and go back to spending as usual. It is starting to look like there will be a prolonged return to normality, which may take several years for us to figure out the “new” normal. There’s been extensive discussion of the “shape” of the recovery going from U-shaped, to V-shaped, to W-shaped, and now to the Nike “swoosh” shape.

So, when thinking about whether or not prices will increase, we have to analyze what has been happening on both the demand side and the supply side of different industries. 

Technology – decreasing now, decreasing later

The technology sector is poised to be able to make huge gains from this crisis. For one, we have seen many of the tech companies see windfall profits as we have transitioned to online and remote work. These industries can undoubtedly increase their prices, and we would pay them. However, these firms have low marginal costs. That is, any pricing over $1 is profitable for many established tech companies. 

Though these companies can increase their prices, it makes more sense to try and retain all of the new customers they have recently acquired.  

Automobiles – decreasing now, increasing later

Cars and trucks are a good indicator of what’s to come. New cars, used cars, rentals, everything is down to record lows. Demand has decreased substantially. Moreover, “plans to purchases a vehicle in the next five months declined 34% in April.” There is also an excess supply of used cars. So prices for automobiles have seen a substantial decrease. When businesses begin to reopen, we may see some folks racing to their nearest dealership to take advantage of the deals. These consumers will likely reduce the excess supply and increase prices, but not any higher than they were pre-COVID.

In fact, due to COVID perhaps restructuring the labor force a little bit, there may be an ample supply of unemployed workers looking for jobs, which may push wages down, and thus, allow for cars to sell at a lower price. Since it costs less to make cars, we can charge less to sell them.

Energy – decreasing now, increasing later

On the other hand, we are experiencing meager prices for oil and gas. With such low prices, this may increase the demand for cars, particularly trucks and SUVs. It all depends on how long we have the supply glut. 

As airlines pick back up and we start driving to work and all over the place, we’ll likely see the prices rebound. But, as mentioned, this will be a slow process, especially since a good part of the oil price decline has been a supply glut that was unrelated to the COVID-19 pandemic.

Food – Increasing now, decreasing later

Food supply chains have seen an enormous disruption, namely those that deal with both grocery stores and restaurants. Meatpacking firms have experienced a detrimental blow due to COVID infections, reducing the supply, and pushing prices up. Moreover, packaging requirements make it hard to merely direct food that was to be sent to restaurants over to grocery stores. As a result, beef prices are at record highs. Chicken is still relatively steady but pushing for higher prices. Eggs have seen a considerable price increase. Pork has also seen a rise. 

Furthermore, the demand for foods that don’t go to restaurants has increased substantially. Think macaroni and cheese, frozen foods, canned goods, and snacks (I’ve been buying way more Oreos as a result of the lockdowns). These foods are experiencing an increase in prices now but may see a reduction as people start going back to work.

As the meat processing plants begin to recoup their labor force, the supply of processed meat will increase again and push prices down. Importantly, as schools reopen, this will help soften the food glut we are now experiencing, especially at lower prices. Hopefully, some of the regulatory barriers that have softened to allow the supply chain to redirect food to grocery stores will help. 

Something that may come out of this COVID crisis might be investments in further automating the food processing system. So, this will likely also reduce prices. 

Education – I dunno

Universities are suffering severe losses in tuition revenue. Usually, recessions cause the demand for a college education to increase. Moreover, easy access to tuition assistance in the form of subsidized and unsubsidized loans flame that demand. On top of that, as all levels of government allocate more funds toward unemployment and COVID relief, this will reduce public funds that are allocated toward education, thus pushing tuition prices up even more.

However, this time it might be different. If universities have to transition to more online classes, enrollments will decline. We already see it. People go to college, not only to get a degree but for the college experience. How long will it take to get fans back into the Doak football stadium? With such low enrollments, the rate of tuition growth will likely slow down if it doesn’t go negative. 

Moreover, with the transition to online learning, how many firms will be happy with certifications that are obtained outside of the traditional university setting? 

Healthcare – increasing now, increasing later

I can’t see any reason healthcare costs will decrease. COVID-19 has not only hurt the healthcare system, but it has also caused other treatments to be delayed. This “pent-up” demand will unleash and push health care prices through the roof. Because of the lockdowns and the halting of “elective” procedures, health care consumers have delayed prescriptions, treatments, and other health care services. This will cause health care issues down the line and will flood the system again. 

We will likely see this play out most tangibly in our insurance premiums in the coming year. 

Housing – decrease now, decrease later, and maybe increase after a while

Housing prices are predicted to fall a few percentage points in 2020 and will probably not increase until the end of 2021. Lower prices and friendly interest rates are a boon to buyers. But, buyers have experienced a tremendous loss in income. Perhaps, many homeowners have attempted to refinance their homes at lower interest rates. Granted due to COVID lockdowns, the refinancing process has been a hassle for many. But, once businesses start reopening, we’ll see these refinances happen quite rapidly. The uptick in refinances will put upward pressure on interest rates which should slow down housing sales even further.

In sum

Indeed, a reopening of businesses may increase the demand for those goods and services that were temporarily shut down. However, depending on the gravity of the loss of income, the demand increase for these “nonessentials” may not be enough to increase prices. Prices should stay relatively low relative to pre-COVID levels and will likely increase at the tail end of the swoosh. 

Hysteria: $1.5 Trillion Injection From the Fed

 On social media, people are up in arms with how the government is quick to take care of the filthy wealthy bankers and don’t care at all about the working-class folk. “Oh, so the government can inject $1.5 Trillion in an instant to save the banks but can’t provide free healthcare to the 99 percent or free college education to its citizens. DISGUSTING!”

These types of comments show a lack of understanding of financial markets and are simply wrong. The Fed injection is an effort to make sure the bank or financial institution where your money is deposited is there when you want it. It is not merely to make sure the wolves of Wall Street don’t go hungry—it’s to make sure you don’t go hungry. 

The Fed 

The Federal Reserve or the “Fed” is the central bank of the United States. This entity is purposely separated from the government to avoid political influence. The Fed is a bank. And, like any bank, it does not give money to any firm or individual. It is the mediator between borrowers and savers, of which are banks or the U.S. government.

The three primary functions of the Fed are:

• To control the price level by adjusting the money supply via monetary policy.

• To make sure we can all pay each other efficiently and effectively.

• To make sure banks are doing crazy things via regulation.

When we see headlines of the Fed “injecting” money into the financial system or “Wall Street,” they are not giving money to Wall Street. The Fed has bought short-term Treasury bills, which are government bonds or IOUs, from banks. The banks then use this money to loan out at lower interest rates (because the supply of money has just increased). The lower interest rates are supposed to incentivize borrowing, which keeps businesses and individuals investing in productive stuff.

The intended outcome of this “$1.5 Trillion Fed Injection” is that you, the 99 percent, get to keep your job. 

The Fed vs. The Government 

Monetary policy refers to the actions taken by the Fed. Fiscal policy, however, applies to actions taken by the government. We can shout, “Disgusting! Unbelievable! I…I, just CAN’T,” when the government starts to enact fiscal policy by injecting cash into their preferred industries. We can then wonder why that money isn’t going toward healthcare, education, paid-leave, daycare, farms, ice cream shops, toilet paper, or any other industry to which you believe we are righteously entitled. 

In 2009, the government and the Fed engaged in policies to help the economy facing a downward spiral. The Fed aimed to battle the contracting economy by buying government securities, or bonds, to increase the money supply. But, when that expansionary monetary policy proved not to be enough, the government injected cash, in the form of fiscal policy, into the banks with the Troubled Assets Relief Program (TARP). 

Both organizations were trying to help the average American citizen, and both were trying to do the right thing. There is a difference, though.

The Fed is a nonprofit organization, but makes a profit as any other bank does, buy paying savers lower than they charge borrowers. Notice how, when you save your money at the bank, the interest rate is lower than when you go to the bank to borrow the money? That difference is the profit, which goes toward operational expenses and then back to the Treasury Department, since the Fed doesn’t keep any of its earnings, and used toward government expenditures and reducing the federal debt. 

Outside of the excess profit from the Fed, governments do not make a profit. They don’t “produce” anything. The government’s money comes from taxpayers. When the government buys or provides anything to individuals, firms, or industries, it must obtain those funds from taxpayers. Given that it’s hard to take the money from you at once without guns coming out, they’ll borrow it from future taxpayers–the older you, your children, and your children’s children. 

Takeaway

So, no. The government isn’t giving money to anyone with the $1.5 Trillion injection from the Fed. Rest assured, the government will engage in fiscal policy pretty soon. For example, the payroll tax suspension proposed by the president could dwarf the fiscal measures taken in 2009. Billions of dollars will be spent to combat COVID-19 and the subsequent economic implications. Some of these expenditures will help! But, some will be a complete waste of money and maybe perpetuate the problem. And, given it’s an election year, you can bet your money on the government taking drastic measures in the attempt to make sure we are all fat and happy. Time will tell.

This stuff is complicated, even for economists. There is enough ignorant hysteria with the pandemic. Adding an extra dose of ignorant hysteria will certainly not help the situation.

The “Economy” is Much Harder to Control Than You (or Trump) Thinks

As humans, we are plagued with the innate hubris of our ability to control our world. Here’s the reality: Not only do we have very little control over our own career paths, but we hardly stick to our own weekly schedule! There are far too many variables that get in the way of our plans.

Despite our shortcomings, our overconfidence pushes us to continue thinking we can plan the course of our outcomes. So much so, that we implement economic policies to plan the outcomes of millions of people.

source: tradingeconomics.com

Trump’s tariffs—the taxes on imported steel, aluminum, and other products— did not reduce the trade deficit. The trade deficit actually grew. [Refer to the graph above.] Some economists attribute this partly to the Trump tax cuts. The tax cuts of 2018, reduced the amount of money taken away from consumers and producers, allowing them to, well, consume and produce more. We consume a lot of imported stuff. Moreover, we use a lot of imported stuff to produce other stuff.

Tariffs, on the other hand, increased the price of steel. This, of course, has the opposite effect. The increase in the price of steel means that it is more expensive to produce stuff, so we should expect the price of stuff to increase. If sellers of the stuff can’t increase the price without losing a whole bunch of consumers, then they HAVE to reduce how much they produce. The tax cuts and the tariffs have the opposite effect. Tax cuts essentially make things cheaper where tariffs make things more expensive.

Woops!

This is not a revolutionary insight. Economists have argued this to presidents and politicians for years, except maybe Peter Navarro. Most of us learn this in our introductory economics courses in high school and college. So, why do they continue to do it?

Luckily, economists can also help answer this question. Public choice economics is the study of non-market decision making. It’s the economics of politics. The basic idea is that if profits in a market or business setting come in the form of dollars, profits in the political setting come in the form of votes. In each scenario, the actors—the business person or the politician—are seeking profits.

When it comes to policy making, we often find what is being implemented is being counteracted by something else. A fun example is when governments subsidize teen employment but are also calling for large increases in the minimum wage. Or, when a government says it wants to subsidize education so that people can have higher earnings and wealthier lives, but end up drowning a generation in debt instead. Or, when governments enforce occupational licenses for safety reasons but limit the ability for people to get a job.

How about when the government decides to spend more money on new projects that will “stimulate” the economy? This sounds great in a speech! But, what we get is an increase in government borrowing, which increases the market interest rate, which makes it tough for individuals and businesses to acquire capital to produce more stuff and “stimulate” the economy. This “crowding out effect” counteracts any kind of real stimulus.

There are literally thousands of examples of backward policies. What’s more is that these are the things we can actually observe. How about all the stuff that we can’t observe? All those lunch dates, meetings, snafus, and other chaotic non-planned events that get in the way?

When dealing with people there is no way to organize them that is better than the spontaneous organization of the market. When any politician says that they can “fix” the economy, it’s probably safe to assume that it will have the opposite effect.

Making Sense of Nominal GDP Targeting

Jerome Powell replaced Janet Yellen as the new Chairman of the Federal Reserve.  This change will give the Fed a chance to reconsider how it conducts monetary policy.  There had been a consensus among macroeconomists since the 1980s, but like many things, it was shattered by the Great Recession. 

Inflation Is Weird Right Now

Though we don’t like the sound of it, prices aren’t increasing as fast as the economy’s overlords would like. We might need to thank globalization for that. 

Duped Because We Don’t Know Economics

Citizens of the greatest economy in the world don’t know economics. This comes at a high price when we’re duped into accepting bad economic policies.

The Silver Fox Gets Us Ready For A Rate Hike

To update, the Fed has increased the fed funds rate 25 basis points to 1 percent as of March 15. Read more here. 

How the Great Recession Shaped Millennial Careers

Our exploration of the formation of the modern economy picks up in the aftermath of the dot-com crash that cost our drunk uncle a pretty penny. Our rollercoaster economy spent the early years of the millennium clinking and clanking back up to the top of the track. But, it was the stomach-churning drop into the Great Recession that defined our generation’s entrance into the workforce.

How Our Parents Helped Create the Modern Economy They Do Not Understand

As we continue examining the foundations of our modern economy, let’s take a look at how our parents’ generation helped revolutionize labor skills, before getting left behind.

What The Rate Hike Means For Us

The silver fox may come bearing gifts this holiday season, as the Fed will (probably) increase the mother of all interest rates—the federal funds rate.

In an attempt to save the economy from the financial crisis of 2008, the Fed dropped the federal funds rate down to effectively zero. For close to seven years, the rate has not budged. Finally, it seems like the Fed is okay with loosening the grip off the economy’s bike seat, and reigning in some of the money in circulation.