Growing Our Way Out of Inflation

With fall in full swing and snow adorning the mountain tops, I turn to a classic dish for a little winter comfort: Campbell’s Tomato Soup. First introduced in 1895, the can would don its familiar red and white label in 1898 after an executive attended the annual Cornell-Penn football game and “was impressed by Cornell’s new red and white uniforms,” according to Campbell’s website.

Stubbornly consistent, very little has changed about the soup over the century it’s been available. As such, it makes for an unusual, albeit informative, way to measure a current problem: inflation.

For the first 76 years of its existence, until late 1973, consumers paid $0.07 to $0.12 per can thanks to government price controls on food. As of January 2020, the average advertised sale price was $0.85 per can, resulting in an approximate inflation rate of about 4.3% per year over 46 years (from when the controls were lifted.) Today the average price rings in at $1.18 per can. Do the math, and that means the average price has increased at a 17.8% rate over the past two years alone.

This shouldn’t be surprising to anyone. Prices have been on the rise across the board. Inflation has become a household word and the boogieman everyone is trying to stop. Who or what’s to blame? It depends on your news source: Democrats, Republicans, OPEC, COVID, Federal Reserve (Fed), suppliers, consumers, the person who owns your local bakery… you name it. As if these individual entities have a lever in their office that directly controls the prices of goods and services. I find the image of the corner baker maniacally laughing while raising the price of croissants, thinking, “That’ll get ’em!” both humorous and completely inaccurate.

The reality is no one wants to raise prices, least of all the businesses that serve you. The higher the croissant price, the fewer sold alongside a cup of morning coffee. But the cost of flour, sugar, energy for the oven, and labor has gone up, so what’s the baker to do? Their sole purpose as a business is to provide value to their customers and generate a profit. When costs go up, prices go up. It’s a simple balancing act. Can anyone fault a business owner for raising prices because of increased costs?

Yet, consumer spending remains high. Anyone who’s traveled lately is familiar with the long lines at DIA or the difficulty in finding some of the goods we all still want. Personally, I assume most things I order are going to take at least two weeks more to arrive than anticipated. With consumers adapting to higher prices, I believe it’s unlikely we’ll see significantly lower prices soon. Inflation is “sticky.”

Last week’s Consumer Price Index reading was a welcome shift in what had been continuous increases month over month and year over year. The September number was +8.2%, meaning that for the same basket of goods and services, prices had risen by 8.2% over the past year. However, this month saw that number “drop” to +7.7%, the lowest annual increase since January, according to CNBC. Some believe this is a sign that perhaps inflation has peaked and might trend toward more reasonable, long-term levels. They think this might give the Fed enough data to slow down the rate at which they’ve been increasing interest rates. I hope this is the case, but “hope” isn’t a financial strategy.

Even if inflation has peaked, goods and services are still +7.7% higher than a year ago, at which time they were already much higher than the year before. If companies and consumers continue to adapt to higher prices, all we’ve done is hit a new price plateau. By raising the cost of money (interest rates), the Fed has seemingly applied enough “brake” to slow us down momentarily. Unfortunately, continuing to raise the price of money puts us at an ever-increasing risk of a longer and deeper recession. I don’t believe that method of fighting inflation works.

For many years, consumers got drunk on the idea of cheap money. Cash is trash was a popular saying. While the Fed kept interest rates near 0% for too long, swinging the pendulum to the other extreme is unlikely to fix the problem.

Instead, I believe we need to increase our productivity to lower prices. Readers also know of our inflation analogy of apples: If the economy is ten apples, and there are $10 in the economy, the price per apple is $1. When the government printed and pushed 40% more dollars into the economy over the past two years, that $10 increased the money supply to $14, but the economy still produced the same ten apples. The price per apple is now $1.40. Now, that’s inflation! Raising interest rates or the cost of money will not cause the price per apple to fall but growing more apples will. If we grow 14 apples and have $14 in the economy, the price per apple will fall to $1. The solution is to increase productivity, produce more goods and services, de-regulate, lower the friction between business and people, and incentivize growth. That is the solution.

The definition of entrepreneurship is taking some raw material or product and creatively adapting it to a new, higher-valued level. There are so many opportunities in our economy. Innovators wake up every day thinking about how to do things faster, easier, better, and cheaper to raise value for consumers and businesses. Our way out of inflation is not by making it more complicated or expensive to do business but rather by tearing down the barriers that make starting and growing a business so difficult.

We need to grow our way out of inflation.