Will inflation keep rising next year, and beyond?
This begs the question: How much should you budget next year for pay raises?
My View on Inflation
Inflation is based on supply and demand, and the cost of production.
In the next 18 months, material supplies will increase as the supply chains straighten out across the globe. As supplies increase, opportunistic pricing will decrease.
The supply of labor is another topic altogether, and one that I will be watching carefully and reporting on.
Having said that, when the global economy opens back up, costs of materials should start to even out, barring any unforeseen supply shocks.
Demand is up for a few reasons, due to:
- “Pent up” demand from people not spending, which is always short-lived
- The extra money the government handed out. The extra savings that were built up during the pandemic has now been spent for the most part.
- Climbing stock market wealth, which also drives up spending. The market has been on a tear lately.
- Panic buying, which happens for different reasons. Lately, people have been panic buying holiday gifts.
- A general feeling of wealth that people have from pay increases; which will get countered by the increase in cost of living.
Nothing goes up forever. I have been around to see many economic ups and downs (and downs and ups).How much should you budget next year for pay raises? Click To Tweet
There are two types of inflation:
- Prices driven by supply and demand in an open market (gasoline, homes, etc) will go up and down with supply and demand.
- Other items that are sold in an inefficient market (like insurance) will likely not come back down unless there is intervention.
If inflation keeps rising, you can expect the Fed to step in and curtail it. Once they do that, it will cool off the market overall, even for landscape services. So keep an eye on that.
First, the Fed will stop quantitative easing (buying bonds, which they have said they will do soon), and then they will increase interest rates. It will be interesting to see how quickly they will act in the first half of 2022.
How Should You Deal With Inflation in 2022?
- By budgeting and pricing for it now.
- By having clauses in your contracts that allow for material price increases.
- By avoiding 3-year agreements that lock in price.
- By avoiding 1-year pre-payments that lock in price.
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