June 15, 2020
The early part of 2020 has been wild. Between a pandemic, record unemployment, and near-record equity market returns, I’m surprised any of us know which way is up, and which is down.
Well, add another head scratcher to the list – conditions seem to be in place for us to experience an inflationary depression. That means we’ll be in a depression, but prices will rise.
It’s unusual to experience an economic depression (loss of jobs, incomes, etc.) and inflation at the same time. Unfortunately, many folks are already in that position.
The recent layoffs have disproportionally affected those on the lower parts of the income ladder. Last month, Federal Reserve Chairman Jerome Powell noted that 40 percent of people earning less than $40,000 per year lost a job in March.
So, the worst pain was dealt to those who could least afford it. Federal stimulus aimed to help, but insolvencies continue to pile up. In multiple states, miles-long food bank lines look like the modern equivalent of “bread lines” from the 1930’s.
The depression side of the equation is driven by mass unemployment, business closures, and cutbacks in consumer spending. The inflationary side will be driven by supply chain breakage, COVID-19-related cost jumps, and shortages of critical goods Americans need.
Look at what’s happened with toilet paper!
Beyond that, grocery prices experienced their largest monthly prices increases in 50 years last month. Meat and eggs led the way as COVID-19 is ravaging meatpacking plants.
Simultaneously, COVID-19 is forcing retooling throughout the food supply chain, from harvesting all the way to store delivery. Everything must be redone to increase safety.
This costly retooling will happen in every industry with heavy foot traffic. Most of those have tight margins, making their survival anything but guaranteed.