Inflation clocked in at 9.1% for the year ending in June, the worst rate in 40 years. It’s impacting business in all corners of our economy. Most are recalculating budgets, cutting back or considering it.
We all are wondering what our customers are thinking. And especially: How long will this last?
History is a good place to look for guidance on the how-long question. It will last until interest rates go high enough to slow down demand and/or inflation’s technical causes change.
Inflation has complex causes but today, as was true 40 years ago, energy is THE key causation and war is a big factor in triggering it. There are strong parallels between that last bout of inflation and what’s happening now.
Energy costs are key because energy propels the economy—which Kentucky is fully integrated into—and factors directly or indirectly into every product’s cost; most impactfully, gasoline costs hit every household budget with immediacy. Unplanned-for energy price hikes suck money away from all other economic revenue streams without adding productivity or efficiency. Pain but no gain. It makes us angry.
Some of us are old enough to remember how the inflation of 40 years ago (it began nearly 50 years ago) stemmed in large part as it does today from geopolitical conflict that brought increases in energy costs. The tactic works; it triggers economic and social pain.
In the 1960s and ’70s, Israel won two wars against Arab neighbors aiming to crush it. OPEC then increased oil from $3 a barrel in early 1973 to $30 in 1979. Today Russia, now a major energy player, aims to crush Ukraine and has weaponized its oil and gas. The U.S. and the West backed Israel then and we back Ukraine now.
Higher interest rates at some point will slow demand and tamp down inflation, but the true solution will involve the global energy market. The early ’80s saw interest rates briefly hit 20% to tame 12-13% inflation. Fortunately, today there are options that were unavailable in the 1970s and ’80s. Innovative exploration has unlocked new oil and gas supplies, and the U.S. is the world’s largest producer of oil and gas.
There are logistics-transport problems to solve so that our U.S. oil and gas can replace what Russia has taken off the market, but they are very solvable. It requires infrastructure and takes time and money. Fortunately, the U.S. is the world’s richest country. Our values are the basis of our wealth: Democracy, rule of law and social liberty attract the best and brightest to our shores and allow them to innovate and excel.
The longer inflation lasts, the more everyone slows down, the more interest rates rise and the longer it takes to correct. Federal Reserve policy mandates it to steer an economic course of stable prices and full employment, which its leadership has determined is 2% inflation and jobless rates of 4% or less. The Fed is raising interest rates to make money more expensive and slow down demand. Higher interest rates are painful but not nearly as bad as uncontrolled inflation.
Customer spending is falling. So is the value of money—especially future money not in hand now, like the payoff for companies stretching financially today to expand revenue streams tomorrow. For startups and new tech companies, inflation’s impact is magnified.
As a hard-goods manufacturing state, Kentucky will suffer less. Get ready for a tight year or two. And hold on tighter to our U.S. values.