Every day there is an article written about inflation, which has become the new buzzword in financial circles. Whether we are feeling it or not, inflation is happening all around us. As we know, inflation is a measure of the rate of rising prices for goods and services in an economy. Using CPI data, over the past ten years inflation has remained relatively stagnant averaging 1.7 percent. However, recently we have seen a rapid increase in this rate. The annual inflation for the month ending August 2021 was 5.3 percent and reached the highest level since 2008 in June of 2021 at 5.4 percent (U.S. Bureau of Labor Statistics https://www.bls.gov).
So, we ask ourselves what is causing this increase in the cost of goods and services (i.e. inflation), and are these inflated costs here to stay?
One answer to the first question is supply and demand. There are multiple factors impacting both the supply and demand for goods and services but to keep this article from turning into Econ 101, we only talk about a few such factors. One being supply chain disruptions which have caused a shortage in products, most notably the microchip shortage. Due to the shortage of microchips, the supply of automobiles, appliances, TVs, and various other consumer products has declined. This lack of supply has led to increased prices for such products. Another answer to the first question is energy costs. The cost to manufacture products is comprised of expenses such as electricity, fuel, and natural gas. As of August 2021, the annual increase for energy commodities was 41 percent. This is another factor driving the price for goods higher.
This leads to our second question. Are higher costs here to stay? Simply put, it is hard to say! Should supply levels improve and energy costs decline we could see a return to more normal pricing levels. However, there are other expenses within the cost structure of products and services that will not be so easily reduced, such as wages. Therefore, some people argue that inflation may be around longer than projected.
Now that we have a general understanding of inflation and factors that impact it, ask yourself, have you experienced delays in securing supplies, delays in delivery of new buses, increased fuel costs, or wages? You might be able to initially withstand these rising expenses but what is the impact to your general fund? Additional operating dollars could be required sooner than projected, depending on where your district is in its levy cycle and if expenses continue to increase at higher inflation rates. During the past 10 years, low inflation has allowed for easier management of expenses. However, if inflation rates continue to rise, closer consideration should be given to the assumptions applied to variable expenses within your Five-Year Forecast.
So, ask yourself how is inflation impacting your district’s finances?
David Tiggett is Managing Director of Public Finance at KeyBanc Capital Markets. 614.460.3463 | email@example.com