Inflation Concerns Reach Highest Levels In Recent Memory

It has been many years since inflation concerns have dominated the national conversation about United States Economics.

That is according to Dr. Thomas Payne, the Dean of Tennessee Tech’s College of Business. Payne said the concern stems from the Federal Reserve’s aggressiveness coming out of the pandemic. Payne said the amount of money being printed without a matching increase in goods and services can ignite inflation.

“People with more money to spend could be also inflationary,” Payne said. “So those sectors you’re talking about in particular areas, we’ve seen it in commodity prices. Anybody that is in the construction business, if you’ve priced lumber lately, lumber prices have come up.”

Payne said that wage increases can also cause inflation unless more goods are actually being produced. He said there can be a positive side to this unprecedented level of federal spending if its truly being invested into infrastructure.

He said if spending is for current consumption, it is a tax on future generations who will see their standard of living decrease.

“If we’re truly investing in infrastructure, there’s a bill up right now, the administration has put forward a bill and there’s rightful discussion and controversy of how much of it’s infrastructure and how much of it’s other,” Payne said. “So congress is working through that one right now but if you invest in things… roads, bridges, public broadband and one could argue education. As long as that money is spent and invested wisely. Then you could argue that, that is an investment in the future. In other words, the folks that will pay that back are getting benefit from it.”

Payne said the tools at the financial market’s disposal can be a double-edged sword. He said there are more tools to combat inflation and more ways to cause inflation than in the 1970’s and early 1980’s.

“They pay today interest on reserve balances,” Payne said. “Banks have reserve balances that they hold, somewhat for liquidity purposes but primarily that helps us facilitate monetary policy through the banking system. So they can increase or decrease the amount of interest that they pay banks for just holding reserve balances. Money that’s held in reserve, they didn’t start paying money on reserve balances until the time period where we were dealing with the last financial crisis and the housing crisis.”

Payne said that once inflation starts it is difficult to stop, leading to higher interest rates. He said many might remember the effects of high interest rates in the 1970’s and early 1980’s where rates got to 10-12 percent.

“If you’re paying 10-12 percent on a on a home loan… can you imagine what you’re having to pay? So that’s going to drive down prices of houses and what people are able to pay if interest rates get out of hand,” Payne said. “Why would they get out of hand? Because if you think about it, if I’m going to loan you money and inflation goes up to five percent.”

Payne laid out the process from the perspective of a lender dealing with rising inflation.

“In order for you to pay me back right now, we’re about 2.5-2.6 percent right now… If that inflation creeps up I have to make at least that, to stay even on the year. In other words, if inflation is 2.5 percent and I’m not making at least 2.5 percent, my purchasing power just reduced by 2.5 and so I’ve got to charge you a higher rate because there’s risk involved, time value and money involved and so as inflation comes up, so will interest rates.”