Statistics: What Inflation Numbers Signal
Updated 2/12/20, Posted 8/7/13
By Jean Regan, President & CEO
In this seven part series, we take a look at different commonly referenced indicators and explore the impact they have. The indicators we examine are (1) the unemployment rate, (2) the inflation rate, (3) housing sales and starts, (4) the Federal Reserve’s Monetary Policy, (5) retail sales, (6) ISM non-manufacturing and manufacturing index, and (7) GDP growth.
We hear these numbers rising and falling all the time and it can be difficult to grasp what these fluctuations mean and how these facts can be put to use. As a business owner, I’d like to share how I put these into perspective and how they influence my decisions.
We started this series with an article on the unemployment numbers, and this time I’d like to focus on the meaning of inflation.
What is inflation?
Simply stated, inflation is a rising price of goods and services over time. It most commonly occurs when an excess amount of money is created, but can also take place for other reasons. The U.S. Bureau of Labor Statistics produces a Consumer Price Index (CPI) for a variety of common goods (bread, cars, clothing, etc.), which is the primary method of measuring the inflation levels.
You may have seen the pictures of people in Venezuela using their currency to make baskets or other goods. This is inflation at its worst – when a currency is almost worthless.
Inflation also impacts people living on fixed incomes – if their income does not rise with inflation, their purchasing power is eroded. This is something that retirees often lose sleep over – have they saved enough money to retire comfortably accounting for the impact of inflation?
What does inflation mean to the economy?
When you mention inflation, people normally think of the negative effects as mentioned above, but there are also positive aspects. One is that inflation encourages people to make non-monetary investments and start new projects, like building an addition to a home. Another positive is that inflation ensures the central bank has the capability to change interest rates in order to mitigate a recession.
The negative effect—and the one with which most people are familiar—is that the longer you hold onto a dollar, the less it is worth. This is especially true during a recession.
What does inflation mean to me?
As a business woman, inflation forces me to keep an eye on both what’s happening right now as well as how current events might influence the future.
If the longer you wait to make a purchase, the less is costs you, that can be deflation (exempting some products that's value naturally decreases over time such as a car, of course). In these times, I'll delay purchasing if possible. In conditions of inflation, I'll make purchases more quickly if it looks like it will continue or increase.
What does inflation mean in the logistics industry?
In the logistics industry, it’s important not only to watch what’s happening with inflation in the U.S. but world-wide, since this will influence buying power around the globe. China experienced its highest inflation level since 2011 this January (5.4%) due to the coronavirus, and there have been other countries as well where high inflation has had a huge economic impact.
The cost of fuel is another item to watch since it can have a huge impact on inflation.
Inflation influences the total cost of goods as well as the cost to move them, which is what our industry is all about. Therefore, it is imperative that you ask yourself the following questions to be successful:
1. What assumptions about inflation rates underlie the choices you’ve made about your supply chain network?
2. Have these assumptions changed? Have we identified those costs that we can limit the effects of inflation going forward? For those costs subject to inflation, is there a way to mitigate the impact of inflation on those costs?
3. Do you need to make changes to your supply chain in response to your answers to numbers one and two above?
We need to be aware of what’s happening around us, not only in the stock market and other prominent numbers, but also with inflation—and be ready to adjust.
Have you seen inflation impact the logistics industry or do you have tools you use to keep an eye on inflation? Comment below to share.