Supply, Demand and Inflation

The law of supply and demand combines two fundamental economic principles describing how changes in the price of a resource, commodity, or product affect supply and demand.  As the price increases, supply rises while demand declines. Conversely, as the price drops supply constricts while demand grows.

While market forces are likely to allow supply and demand to reach equilibrium, the process can take time and can be stymied by structural limitations.   For example, the supply of super bowl or Taylor Swift concert tickets is finite, often leading to exorbitant prices if demand surges.

The same effect can result from temporary outside influences on supply and/or demand.  At the advent of Covid restrictions on the economy and pressure on the supply chain for certain key products, supplies were adversely affected.  Compounding the problem was a government effort to help Americans deal with anticipated and actual problems through a significant infusion of cash and debt relief.  With downward pressure on the supply side and a program of “free” money and accelerated government spending that served to increase demand, prices went up.

While the foregoing may have been a contributor to the recent upsurge in inflation, it was by no means the only factor. 

Investors should seek to understand the components of the current round of inflation as it doesn’t affect all portfolio segments or standards of living equally.  For instance, if you own your home, have substantial assets and spend a relatively small percentage of your income on day-to-day necessities, such as food and fuel, you could be a net beneficiary.  Consider working with your advisor(s) to understand how inflation will affect your situation.

All comments and suggestions are welcome.

Walter J. Kirchberger CFA