85. What’s Causing Inflation in 2021 and is Biden to Blame?

Dec 31, 2021

Why Are Prices Rising and Who is To Blame?

Inflation is a dubious topic and a lot of people are searching for answers when it comes to inflation increases in 2021. For many years inflation in the U.S. was so low many people didn’t care about it, but everyone seems to be talking about rising prices this year. So, what’s causing this historic rise? 

Coming out of the pandemic, we were simply not ready to see the amount of demand we saw from consumers. Coupled with a new governmental administration, we’ve seen a dramatic delay in our supply chain. These issues along with a variety of other factors: labor costs, asset bubbles, etc. created a perfect storm in 2021 for inflation to rise. On today’s episode, we’ll discuss the cause of inflation, who’s to blame, and how we can protect our financial future against inflation.   

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TIMESTAMPS (SHOW NOTES)

2:19 – U.S. inflation at a 39 year high 

3:27 – Why do prices keep going up? 

7:39 – Is Biden 100% to blame? 

8:22 – What actions will the Fed take and what are the consequences?

14:26 – Will infrastructure bills contribute more to inflation? 

20:52 – Higher energy prices and its domino effect 

21:50 – The erosion of purchasing power 

23:27 – How can you keep up with inflation but protect your portfolio? 

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Review the Transcript:

Ron Stoks:
Welcome to Retirement Talk, the Redefining Wealth Show. Your source for financial information for pre-retirees and retirees. We’re here to help you better navigate during these financial times. We’re here to discuss thoughts and ideas in the field of finance and retirement, as well as discuss trending topics and the impact of major legislation that could impact your retirement. We’ll break it all down. These discussions can help you make better informed decisions, so you can live the lifestyle you imagined and make better financial choices. Laura Stover is a registered financial consultant and CEO of LS Wealth Management, as well as founder and owner of LS Tax, a consulting firm. She’s been featured in Forums, CNBC and the Wall Street Journal. I’m [Ron Stoks 00:01:00]. Our topic for today is what’s causing inflation in 2021, and is Biden to blame?
Laura Stover:
Hello, hello, hello, Michael. How are you doing on this episode of Retirement Talk, the Redefining Wealth Show. My right hand man here, my wing man.
Michael Wallen:
I am super happy about going over today’s topic. I think this is one that many listeners are probably searching for solutions, Laura, and I think you have put the candle on top of the cake with this one.
Laura Stover:
Well, as they say, inflation is a very dubious topic, unfortunately, in the day and age that we’re living in, and we’ve fielded a lot of questions on the topic. We’ll hop right in. That’s primarily what we want to discuss on today’s Retirement Talk. What is causing inflation? What started the cause in 2021, and is Biden to blame? And this is literally an article that we are featuring from Market Realist.com, and as always, go to Redefining Wealth.info for all the show notes and extra insight on what we discuss on today’s show. And for many years, US inflation was so low that nobody really, really cared about it. But the scenario really reversed for 2021 and everyone seems to be talking about rising prices, regarding food, groceries, gasoline, consumer goods.
Laura Stover:
I’m at the gym and I know for a fact, some of the families are really feeling the pinch in the purse, because US inflation measured by the CPI, it has indeed reached a 39-year high on consumer prices. It rose by over 6.8%, and continuing with no end in sight is the unfortunate aspect of this. It’s the sixth straight month, as of the recording of our episode today, that we see these prices rising and topping really close to 7% now, and many people want to know who to blame and when, really more importantly than blame, is the more important question, when inflation, when will it come down? And so the first question, why do the prices, Michael, keep going up, and what causes inflation? There’s a perfect storm of causes here; demand-pull inflation, supply side, cost-push energy, higher energy prices, higher wages, asset bubbles, currency depreciation. Unpack this and help us understand why are prices continuously going up and what is the core reason we have inflation right now?
Michael Wallen:
And the list goes on and on and on. And I don’t think that there’s one area, I think that we are in that perfect storm where we are seeing a multitude of these different angles of how we evaluate the GDP, as well as our economy overall. The healthy side of what we… Consumer side of what we coming out, so I think there’s a multitude and we’ve got inflation, but we also have two other things. We have skimpflation. That definitely comes into the equation. We also have shrinkflation, and those are some of those things that people aren’t really identifying out there. But when we start looking at demand-pull, one of the things is we were not ready, based upon coming out of the pandemic, to see the amount of demand from consumers. That was one of the biggest things that has caught our supply chains off guard.
Michael Wallen:
Another thing is, it can be the debated out there as we look at the two superpowers that battle it out here in the world, which is the United States and China. One administration felt that it was better for us to start manufacturing and generating products being sold into America from resources from America, using America personnel, being able to create that. Other administrations believe that outsourcing that for cheaper labor cost is better, and we’ve seen that battle between the two, and the perfect storm of changing an administration, as we saw through President Trump into President Biden’s administration, was moving away from US domestic manufacturing, and going back into China. And we’re seeing all of the ships that have been out on the outside of our coastline, not being able to get into a port and distribute products to us, we are seeing that impact, so that becomes that supply side inflation.
Michael Wallen:
And so even in that, we are met with that perfect storm of having a labor force that has a resistance to work. And individuals that are out there saying, “Hey, we need to have higher wages. If we’re going to give you our service, we need a higher wage.” And we’ve seen large corporations that historically have had great benefits for their employees, that most recently over the last couple of weeks, that their labor force is coming together and asking to be able to unionize. And so we’re seeing this-
Laura Stover:
I guess if you like a lot of coffee, that might affect you, right?
Michael Wallen:
Yeah, get that caffeine boost, but I guess individuals are looking at the cost of living out there and saying, “I enjoy being a barista, or I enjoy this, but I want the same lifestyle that others have.” Their occupation may be paying more, it may be a greater demand, but those individuals are demanding that same level of compensation. Well, anytime we see labor cost go up, it’s a direct correlation back into the products or services offered by those companies. They are going to push those expenses out to their consumers. And so, like you said, there is a perfect storm and it’s not just one area, and I think it would be a little bit unfair to blame one individual, even though there is a lot of policy that is being created today that supports those causes.
Laura Stover:
You heard it here from the certified financial planner, Michael Wallen. Biden’s not 100% to blame entirely. Is that what you just said?
Michael Wallen:
I think the buck stops at the top-
Laura Stover:
Yes, I agree.
Michael Wallen:
But I believe that there’s additional policies and communication that could be pushed out, that we have created for way too long a scenario that says that you don’t have to work. You can now become dependent upon the government.
Laura Stover:
There you go, yeah.
Michael Wallen:
And we need the dollars coming out. That helps slow down inflation early on, but we are now outside of that. And honestly, people just need to get back to work. Be contributory.
Laura Stover:
There you go, yeah. The currency depreciation and all the other factors support higher prices, and prices for almost everything have been going up, as we’ve stated now and laid the groundwork, and we’re putting this article into perspectives. There’s several factors, but the demand has been quite strong for most products and no one anticipated that that demand would bounce back so strongly, because there was a little window when the pandemic kind of lowed. Now we’re peaking again, as of the recording here in mid-December, where we are now, dependent upon when you’re listening to this episode, where the pandemic has spiked in various pockets throughout the country, and to make things worse then, when the supply on many goods, it didn’t keep pace during that little window when the consumer comes out of the house and they start buying again, they want to travel again, they’re wanting to get back to normal.
Laura Stover:
That demand-supply mismatch is really one of the simple reasons behind a lot of the inflation that we’re seeing now. We’ve kind of identified some of the causes, many link to the pandemic, and certain policies and consumer demand returned with that vengeance once there was that little window, as I just stated, where the vaccinations increased, we saw a dip in the pandemic, and then there was less than ready supply side that led to the logistics and the supply chain issues that we’re familiar with, and then that cost-push inflation occurred in high raw material prices, forced producers to increase finished product prices. These factors all together did indeed create that perfect storm for higher prices.
Laura Stover:
Now, the Fed has been in the news quite a lot here recently, Michael, and he’s changed his stance on inflation, because consumers are very eager, in terms of waiting for it to subside, and that really brought a lot of havoc on budget plans for individuals, because wages are also rising a little bit. Obviously, a lot of companies are begging and trying to hire in almost every industry they’re trying to hire, and it hasn’t been enough to keep up with prices, but the Federal reserve has long said high inflation is transitory. However, the persistent rise has left the Fed faced, and they’re expected to start taking action.
Laura Stover:
This is one of the things I think we can forecast pretty accurately now that we see the mindset, interest rates are going to start to go up in 2022. I’ve read potentially three hikes in ’22, and he’s going to start aggressively, during the 2008 crisis, it was 10 million a month, we’re looking at much more than that to start the bond purchase tapering. How will that affect things going forward in ’22, and do you think the inflation’s going to continue to rise through ’22?
Michael Wallen:
Definitely inflation’s going to rise. Jerome Powell came out this last week and said that… And the markets reacted again. Everybody’s listening to this at different times, but mid-December here, he came out and made a statement that we’re actually going to go from that 10 million to 30 million dollar tapering, and we’re looking for that to hit through mid March of 2022, with three points on the inflation scale. We’re going to see rates expected to rise up through three times into 2022, and I think it’s important to understand a backstory on why this happened. If we put this in, maybe an example of what most individuals out there would see, if you had a company, and we’ll take the government and we’ll say they were a company, and that company was just very successful over a period of time and they had reserve profits, and then decided to take those profits into a profit sharing with their employees, that’s a great thing. Individuals go, “Hey, that’s great.”
Michael Wallen:
Now, let’s look at how the government did this. The government does not have a pool of profits. For them to go out and do the profit sharing, ie., through the pandemic we saw stimulus, but that stimulus was coming from borrowed money and that borrowed money is from future taxation, and so what we ended up having out there is they go in and they bought a lot of treasuries, US treasuries to be able to generate that, because that’s the promise to pay those dollars back. And of course the taxpayers are the ones that pays all the interest on that money as well. Then they took that borrowed money and turned around, printed more money and sent it out as if it was profitable, or the government was profitable and this was a profit sharing.
Michael Wallen:
That’s the polar opposite of what we see in businesses. Now, we’re having to go through a process of tapering that buying down, back down to normal levels, so that we don’t continue creating national debt that can just never be paid back. This is what we call quantitative easing. Unfortunately, we have just added and added and added debt that has now taken us to about $30 trillion, and there is a lot of speculation into what 2030 will look like if we don’t expand our workforce, if we don’t increase our tax base, and there’s two ways that you’re going to generate taxes. Either it’s horizontal or vertical. Either you add a lot more people paying in taxes, or you take a lot more dollars away from those that are paying taxes. That’s the difference between vertical and horizontal taxation.
Laura Stover:
Fed officials say they’re going to taper both mortgage back and treasury security purchases at the same time, and just a little history here; after the great recession, the US Federal Reserve announced the first round of that QE, if you recall, back November in 2008. That was 175 billion in agency debt, 1.25 trillion in mortgage-backed securities, 300 billion in longer term treasury securities, then they did the QE2, then we saw the Fed buy 600 billion in longer term treasuries, then that was followed by Operation Twist, where the Fed bought longer term assets while selling shorter term securities. And the last leg of that large scale asset purchase lasted from September, 2012, until 2014, totalling 790 billion in treasury securities, 823 billion in agency MBS. Bernanke was the Fed chair at the time. He mentioned ramping up the program in testimony before Congress, May of 2013, followed by a press conference in June, and the Fed began slowing its pace of asset buys in 2014.
Laura Stover:
We’re way over those numbers now, with what we have spent. At the time in ’08 when… They absolutely needed to infuse money, we all agree on that, when the initial crisis occurred ’08, or we would’ve been in a big depression had nothing been done. But those numbers pale in comparison to where we are seeing numbers now. The fiscal policy adding to inflation since the bipartisan infrastructure bill has passed, the administration’s working to get behind the bill back better bill and passing. We know it passed through Congress here not long ago, these investments are longterm positive, but they could also add to the inflation in the short term, could they not? Because the president has said that increased spending, he says it will help control inflation by addressing the supply side bottlenecks, but a lot of economists would buy that argument, since the supply problems are only short-term headwinds.
Michael Wallen:
I agree with the economists. I do not believe that the infrastructure bill, and it’s a problem that we always have with a bill; find one good element of it, make it the title of the bill, but then there is so much pork that is built inside of it. And unfortunately, as the statistics or the numbers came out, it was saying somewhere around 15% of the actual bill was actually for infrastructure. The rest of it was agenda-based. That is the part that gets into where policy from administration really skews what we are needing to do. When we go back to the 2012 through 2014 time period, and we saw individuals through mortgage-backed securities, we saw a policy that, over the years, had allowed individuals to qualify for loans that should have never had loans, and then they bundled those loans together and sold those out as a security or an underlying investment option to consumers.
Michael Wallen:
That a lot of their retirements were based upon, unbeknownst to them, they were buying really high risk debt, but was also the rating companies had came in and said those were triple A or double A-rated bonds and they really weren’t. They were B level and some of… They were at the junk level bonds that were skewed in with the other, more favorable, positive side of the bond market there. And so when we look at that, yes, it was a part of policy that was dubious to the investor and something needed to happen. This infrastructure bill is an emotional play to get dollars out and to politically get favor to push this debt out that would be very hard to push through a bipartisan agreement in the house or the Senate.
Laura Stover:
Well, businesses certainly are not sure about the longevity of a stronger demand. I think businesses are very cautious about ramping up production, and it’s going to take time for closed factories, oil rigs, the suspended workforce to come back. Suppliers have started responding to the higher demand, but it’s going to be a while before things come back to normal. And as long as companies struggle to keep up with consumers’ demands, inflation likely will not come down to a level that can be termed as normal, and the prices for almost everything have been going up due to the facts that we’ve discussed thus far. No one anticipated that demand would bounce back strongly after the pandemic lows, to make things worse, and the supply of many goods has not kept pace at all. The demand-supply mismatch really is a big catalyst behind a lot of the inflation that we’re seeing now. You’re listening to Retirement Talk, the Redefining Wealth Show. We’ll be back in a moment to tell you what you need to do to better position yourself for 2022 and the ongoing discussion with inflation.
Ron Stoks:
Thanks for listening to this episode of the Retirement Talk Podcast. To learn more about how we can help you redefine your wealth and make sure you’re on the right track, go to Redefining Wealth.info and schedule a review to talk about your unique situation. Schedule a 15-minute strategy session with Laura and Michael. Speak to our host directly. Go to Redefining Wealth.info. You’ll also be able to get access to today’s show notes. Redefining Wealth.info/podcast. Redefining Wealth.info/podcast. Now back to this episode with Laura Stover and Michael Wallen, about what’s causing inflation and is Joe Biden to blame?
Laura Stover:
There was some interesting tweets that I noticed not long ago, regarding oil prices are up $3 per barrel, above $64 per barrel for the first time since January of 2020. The oil price will likely hit a two-year high this month and a seven-year high this year. That was by Peter Shift. Continuing with his tweet, he said, “We could have also added higher energy prices to the cost-push inflation bucket, but it deserves a special mention. Higher energy prices have a domino effect on inflation. Higher energy prices lead to higher prices for most goods by adding to logistic cost. Higher wages are also adding to inflation; the domino effect between wages and inflation. Higher wages lead to higher inflation and vice versa.”
Laura Stover:
And we have another tweet here by Senator Ted Cruz. “Inflation is the highest in 31 years. Joe Biden is responsible for crisis after crisis and the American people are paying the price.” Okay, the Twitter feed continues to blow up on various topics, depending on the day of the week you look at it, but I think the moral of the story, and we were talking about this during the break, high cholesterol can be a very bad problem. It can be a very bad health problem for individuals. Well, they figure, oh, I’m just going to take a medication. I can still eat what I want, or maybe our DNA is creating some of these problems and it can be a bad thing if it goes unattended. Well, when we talk with clients on a day in and day out basis, a lot of them do not see the silent portfolio killer or the erosion of purchase power.
Laura Stover:
There’s a mismatch in thinking, and you can point the math out to some people. If inflation’s almost now touching upon 7%, no sight in the near future where it’s going to start going down in 2022 at this point, and you are not keeping pace with that. You’re losing money, but I think where the psychology of this comes in, Michael, is the market risk perception and the fear of loss, the loss of version mentality versus not seeing the loss of purchase power, so how can people get their mindset wrapped around just because you don’t see one element, you see it when you pay a price at the pump or you’re buying food, but you’re looking at a statement saying I’m not losing money, versus the fear, oh, the market can’t stay up forever and I don’t want a big loss of capital. I think there’s a big disconnect mentally, because if they just look at the math and take the emotion out, it makes no sense to be overly weighted in fixed income right now, or CD or overweighted in bank products.
Michael Wallen:
The answer to this is personal finance, and individuals truly need to take account of where they are and understand where that dollar is going and how much it is actually buying, because inflation, as you said, is the erosion of your purchase power. For instance, a lot of manufacturers today are adhering to a skimpflation or a shrinkflation approach. What that means, for those that are listening, when we were kids, let’s just say that we went out and we bought a loaf of bread and that loaf of bread, let’s just use a dollar amount and say a loaf of bread was $2, for easy calculation. The length of that loaf of bread may have been 18 inches long.
Michael Wallen:
Nowadays, we are seeing two different things that’s happening going through this, coming out of the pandemic, looking at this time period, of where, because the cost of goods and services are going up at the manufacturing level, we are getting shrinkflation. Go over and look at a loaf of bread, just for easy consumer approach, go look at a loaf of bread and that loaf of bread may be 12, 14, maybe 15 inches long, opposed to what used to be 18 inches long. Ultimately, to have the same consumption of eating sandwiches in your home, you would have to buy three loafs of bread for what you used to buy two loafs of bread for, and so that becomes the shrinkflation.
Michael Wallen:
The other part is skimpflation, where the quality of food we are seeing being reduced, because of the increased cost, we are seeing the manufactured end product with lesser quality ingredients. And so we are seeing that hit us at the dinner table, and you mentioned gas prices going up by $3 a barrel, the price at the gas pump is altered three months after what we see happen on the price of the barrel. From right now, three months from now, and that’s barring any major storm that may happen in the Gulf or supply issues, but right now everyone should be expecting that three months from now we’re going to see a major increase in our price at the pump.
Michael Wallen:
How that rolls back is personal finance. You have to be getting ahead of the game. You have to start now looking and really managing your budget. For a lot of people, in prosperous times, you’ve got more cash flow than what you’ve got in expenses, people really don’t adhere to their budget. Right now, this is a time to line item your budget, truly understand what you’re buying, because Laura, when you go out and you buy a bag of chips and only 25% of the bag actually has the product in it and 75% is air, that’s shrinkflation, and you got to buy three to four extra bags to have the same thing that we used to have in a full bag of chips.
Laura Stover:
Mikey, you need to change your diet. That’s why I go keto, no bread and I don’t really do chips anymore, but I hear exactly what you’re saying. I think the point very well taken, and that’s why we have our proprietary Redefining Wealth Process. We want to go through the six key risk that we’ve identified that retirees, pre-retirees will face. We want to walk you through our life, our proprietary life arc system, where this is very, very detailed and broken out, determining your risk capacity, understanding those budgetary cash flow needs, the risk analysis, the type of money management style, making sure that you have the income needed to last and sustain during the duration of the longevity that you are likely to have.
Laura Stover:
The healthcare and all encompassing tax expenses, which we know are forthcoming, and that might be the next perfect storm. But unfortunately, inflation is here to stay. We might best enjoy the cost at the front end of ’22, because more than likely things will continue to go up. And if you need help identifying a written income plan, or you have a question for Michael and myself, go to Redefining Wealth.info, click schedule review, and we’ll schedule a strategy session with you. Thank you for joining me today. I hope you learned a lot from today’s episode. Again, go to Redefining Wealth.info.
Ron Stoks:
Redefining Wealth is a registered trademark of LS Wealth Management. Take advantage of a complimentary plan. Know where you stand, regardless of the market. Walk through the Redefining Wealth Process and have a clear picture of the key risks you likely will face and achieve a deeper understanding of how to properly plan for these risks with the Redefining Wealth Framework. Schedule a strategy session now, by going to Redefining Wealth.info and click schedule. Redefining Wealth is a registered trademark of LS Wealth Management. Investing involves risk, including the potential loss of principle. Any references to protection, safety or lifetime income generally refer to fixed insurance products, never securities or investments.
Ron Stoks:
Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier. This show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. LS Wealth Management LLC is not permitted to offer, and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US government or any governmental agency. The information and opinions contained herein, provided by third parties, have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by LS Wealth Management LLC. Investment advisory services offered through Optimize Advisory Services, an SEC registered investment advisor. LS Wealth Management is a separate entity.

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