I believe Kevin Brady was correct when he said, “Inflation destroys savings, impedes planning, and discourages investment. That means less productivity and a lower standard of living”. This quote isn’t only directed at each American, it is even more critical businesses and communities understand this as well. I am going stray slightly this week from the micro level of our local communities to the macro level of our nation, a level that highly impacts each of our communities regardless of size. Let’s discuss inflation, product shortages and labor costs and how that will impact local communities moving forward.
In Econ 101, the topic of the law of ‘Supply and Demand’ is often taught and discussed. The concept of ‘supply and demand’ is usually what dictates the price we pay for goods. As we have seen over and over since the dawn of civilization, when demand outpaces the available supply, prices will escalate. Inversely, when the demand falls, prices will tend to fall and equalize over time as well. This makes sense and most people understand this basic concept.
When we go to Econ 201, the plot then thickens a bit. Here we learn an additional economic law telling us, high prices are cured by the impact of high prices. There may be a few exceptions to this rule, however if the economy is allowed to function free of intervention, the competition brought about by the high prices which are due to shortages of supply typically drive prices back down over time.
While both the above laws are very fundamental, what becomes the next consideration is the timeline it takes for the laws to play out. One recent example might be the toilet paper shortage brought about by the rapid increase in demand during the early days of COVID. While the shortage happened almost overnight, it took only a few months to overcome as producers ramped up production by retooling their factories, thus increasing the supply which lowered demand. Both laws played out exactly as economics indicate it should. However, what happens when that shortage is a lack of lumber, or products requiring commodities to be extracted from the ground, or plastics which are derived from oil which is being assaulted politically? When this occurs, you can know that those issues will be around longer than simply a few weeks or months.
Now we come to Econ 301, the law that says, labor tends to follow the first two laws, albeit, in a trailing fashion. When you have shortages and continued high demand, over time this tends to drive up wages as well. Without arguing about what is good, bad, right, wrong, left or right, I tend to view these economic laws as ‘just what is’.
As long as we are discussing economics, we should mention inflation. When you double the amount of dollars in circulation throughout the country in one year, you can bank on inflation throughout the economy. The only question will be the impact of the inflationary pressure on prices throughout the supply chain and for the consumer.
So, the question for your community is this; how will all this impact our community in the coming months and years? First, expect inflationary pressure on nearly every product you need to transform your community. Expect shortages on various supplies to last much longer than one might expect. In some cases, we would hope to see some easing on things such as lumber, but nothing is sure in a marketplace seeking to find balance. Labor costs are a two-edge sword, but the sharp edge of the sword tends to dominate the equation. On one hand, higher wages do provide workers with more spendable income. On the other hand, they also tend to drive up costs adding to the increase in goods and services. So, while workers make more, they are spending more for what they purchase, negating much of that increase creating a vicious cycle. Inflation is the most deadly and unseen tax most consumers and communities forget to consider.
As community leaders, understanding economics in times such as these is critical. Knowing what to expect economically can help city leaders better plan for the future. Knowing how the supply chain works can help business owners think ahead, being better prepared. For chambers to understand how this impacts the city, business, and consumers will help them to better chart their most productive course. Far too many communities just sit back and let what comes be as it may. That is the last thing you want to do. Be proactive, be prepared, and you will be miles ahead of most communities that haven’t a clue for what is coming.
John A. Newby, author of the "Building Main Street, Not Wall Street " column and Facebook group dedicated to helping communities and media companies work together allowing both to not just survive, but thrive in a world where truly-local is lost to Amazon, Wall Street chains and others. His email is: john@Truly-Localllc.com