Inflation

Congress has printed and spent trillions of dollars in the last year. Two “stimulus” checks have gone out to most Americans. Congress is still paying a $300 unemployment bonus, contributing to worker shortages and supply shortages. The Federal Reserve still has rates at zero. Banks are awash in cash with few investment options. Congress is trying to spend another $1 to $4 trillion.

All these factors should lead to inflation; and they have. The Consumer Price Index surged 5.2% year over year in May, the largest increase since 2008. Over the last 12 months, core inflation is up 3.8%, and other industries are much higher: used cars – 29.7%, airline fares – 24.1%, jewelry – 14.7%, shoes – 7.1%. We all know that the price of lumber has skyrocketed, along with most other commodities.

The housing market has taken off nationwide, including Bourbon County. Year-to-date in our region, sales are up 37%, average sales price is up 18%, days on the market has dropped 53%, and pending sales are up 49%. How long this will last is anyone’s guess, but it is obvious that forces beyond the market are at work. With the increase in lumber prices adding about $36,000 to the cost of an average new home, pre-owned homes are becoming more attractive and the market reflects that reality.

Rates are an historic anomaly, as evidenced by the fact that municipalities can borrow at rates lower than the rate of inflation. It does not make sense for cities and counties to save money for projects, when they can lower costs by borrowing at low rates and beating long-term inflation. Case in point, the average rate of inflation for construction costs has been 2.42% over the last ten years (are there any doubts that number is MUCH higher in the last year?); a city can borrow money for around 1%. Thousands of municipalities have taken advantage of this historically rare arbitrage at record levels.

What should a business do? Lock in long-term borrowing rates. Marginally increase normal levels of inventory. Save capital. Have a plan to deal with inflation in inventory, labor and other expenses. Get out of all short-term, variable rate debt. Much of this applies to individuals as well. One positive factor is that our nation’s personal savings rate has doubled the pre-pandemic level to 14.9%, which is nice to see given that people tend to spend money they did not earn more freely.

Inflation is a tax we all pay, regardless of our income level or position in life. A modest, predictable level of inflation is healthy; what appears to be coming is not. Now is the time for all entities, all people to focus on good financial health. Bourbon County can be an oasis of stability in an inflation desert.

Conclusion: Don’t get caught up in the nationwide buying/borrowing frenzy, unless it is absolutely necessary, such as for municipal infrastructure needs. Pay down debt. Save. Let’s position Bourbon County as a financial leader in the months and years to come.