Gas prices are hovering at $5 a gallon, and grocery bills have skyrocketed. And if you’re not already in the real-estate market, good luck finding housing. Inflation is taking its toll, bringing a stunning 7.5% increase in prices over the past year alone. And the war in Ukraine, while most of the world hopes for peace, will only exacerbate the energy crises further.
All of this is triggering inflation, and the factors are complex.
But in some ways, today’s inflation can be viewed though an Econ 101 lens.
For example, when people last filled up their tanks, “it may have cost them $25, and now it’s going to cost them $40 – that’s how inflation can be explained to students,” said Rakesh Gupta, associate professor of decision sciences and marketing from the Robert B. Willumstad School of Business at Adelphi University. “When supply is low, demand is high, and the prices are going to go up”
Gupta was one of three Long Island experts who weighed in recently on a panel on LIBN|NOW, Long Island Business News’ webcast. The panelists shared insights on current pressures and what to expect in the coming months as the region navigates financial turbulence.
RAKESH GRUPTA: ‘More raises are coming this year, but will that be enough, given the inflation rate?’
Serving with Gupta on the LIBN|NOW panel was Martin Cantor, director of the Long Island Center for Socio-Economic Policy; and John Costanzo, founder and CEO of LDK Global Logistics. The forum was moderated by Joe Dowd, editor and associate publisher of Long Island Business News.
Even before Russia invaded Ukraine, there were a host of factors – monetary, fiscal, energy and supply chain policies – contributing to inflation, Cantor said.
“There are too many dollars chasing too few goods,” Cantor said.
Cantor pointed out that amid the pandemic government spending increased under programs by both former President Donald Trump and President Joe Biden.
The government “issued $9 trillion in debt in three years,” Cantor said. According to Cantor, “national debt increased 32% while gross domestic product only increased 12% during that same period – therein lies the problem.”
Pandemic-related supply chain issues also contributed to inflation.
And now, with the Russian invasion of Ukraine, a lack of U.S. oil production is driving up gas prices. Oil producers are paying down debt, according to published reports, rather than raise output.
That output is needed, and experts say that it could be prompted through such federal policy as the Defense Protection Act.
Yet a better approach might me through incentives, Costanzo said.
“That’ll get a quicker response than executive orders demanding ‘whatever’ – they’ll resist those, and they have to for their shareholders,” he said.
MARTIN CANTOR: ‘There are too many dollars chasing too few goods.’
An additional factor hitting our wallets, Cantor said, “is that the spread of long-term interest rates versus short term is now close to 4%,” a figure that former Fed chairman Alan Greenspan deemed “inflationary.”
Still another factor, Gupta said, are the extra dollars now chasing goods.
People saved during the pandemic, Gupta pointed out. “They are now looking for goods,” driving prices up.
Meanwhile, for many, wages are at a standstill.
“Wages are a lagging indicator, so the revenues go up and then sometime later the wages go up,” Gupta said.
Nationwide, “there is a movement to have minimum wage go up to $15 an hour,” Gupta said. “So, there is some money there for the low income workers. But for the middle-income worker or the high-income worker, some are getting raises and others are not.”
Gupta said that many experts expect “more raises are coming this year, but will that be enough, given the inflation rate?”
And there is no one-stop-shop remedy, experts said.
“The Federal Reserve can’t be the only one fixing it,” Cantor said. “It doesn’t have the tools.”
Supply chain, fuel cost woes
Costanzo said that at the ports there is “not enough capacity to bring all their cargo inland.”
That scenario has driven up wages for drivers, even in instances where manufacturing may be going down, he said.
And fuel costs have “doubled in the last year,” he said. “Diesel fuel rates just went up 65 cents in two days last week. Companies cannot absorb that – they’re pushing that back out on what’s called a ‘fuel surcharge’ to their customers.”
JOHN COSTANZO: ‘Diesel fuel rates just went up 65 cents in two days, last week.’
“The carriers have changed the way they have to price their services and they go to a more dynamic model, meaning they look at your volume they look at their capacity” to come up with pricing, he said. Those rates have “increased dramatically, and they are going to continue to.”
Gupta pointed to a current “decrease in the number of truck drivers and shore workers dock workers” as they reevaluate their livelihoods in this phase of the pandemic, further exacerbating the supply chain issue.
Meanwhile, firms are rethinking the way they structure their networks, Costanzo said.
Amazon has moved to a model in which it is “putting product closer to their customers to avoid these long-haul driver impacts, and the cost increases related to moving cargo across three 4,000 miles of North American landscape,” Costanzo said.
Navigating inflation
What happens next is anyone’s guess.
But for right now the region seems to be faring better than elsewhere in the country. Gupta said that northeast New York, New Jersey and Pennsylvania had a 5.7% increase in inflation, when nationwide it was 7.9%.
Going forward, companies may need to rethink just-in-time production, which has proven it can break down. Companies are “going to have to think about reevaluating their inventory policies so that they do have a cushion, a buffer to protect their own manufacturing and production,” Gupta said.
And with the price of transporting goods going up, Costanzo recommends renegotiating carrier goods.
“Be aggressive in an area that maybe you didn’t need to over the last four or five years as it has been fairly stable,” he said. “It’s no longer stable.”
Renegotiating is key, he said, adding that “logistics represent at least four to 5% of every company’s top line revenue.”
Cantor said inflation may last another year.
In planning for contracts six months from now, “I would take some of my reserve cash and put it in the currency that I’m trading with to get my goods and services and buy it at today’s rate,” he said.
It’s these tips, the experts said, that could help remove some of the burdens of navigating inflation, and any subsequent recession.
