There were many reasons for higher inflation between 2020 and 2024. It wasn't nearly as simple as some want us to believe. Now, the world is experiencing a massive trend that is almost certain to keep inflation elevated for some time, Deglobalization. This will directly impact inflation for some time.
The desire to make things locally is a natural response to several factors:
1. Covid and the massive supply chain disruptions highlighted our reliance on cheaper goods bought from far off places.
2. How are some companies so incredibly profitable? Many produce some or all components in far off places, cheaper. How will they maintain and continue to grow profits? The easiest place is to raise prices.
3. Supporting local production is not merely a national goal. It's something sought by towns and states too. Many areas have been decimated when large production facilities leave town.
4. We are realizing that controlling the quality of some imported foods and goods is not easy when they are grown and packaged far, far away.
5. Locally made is part of national/regional pride.
6. Security-wise, being reliant on foreign countries for the components that are used to manufacture security equipment is highly risky.
7. We have seen how oil and gas prices spike when a war breaks out in Russia-Ukraine, over 5,000 miles away. Globally, prices are impacted, even if we are mostly self reliant/energy independent in the US. In 2022, the US exported about 27.1% more energy than it imported.
There is almost one certainty about deglobalization, especially for a wealthy country like the U.S. Higher costs to manufacture. Inflation. Higher prices. Add in reduced lower cost labor and the costs could rise even further. (Fewer workers = higher labor costs). The inflation brought on by deglobalization may be transitory. The shifts and adjustments will not last forever, but they will take years, not months. And they may be offset partially by massive GDP growth.
Many companies are seeking production facilities locally, and it's already adding to the cost of goods. Look closely and you can see it everywhere. Maybe the only real solution lies in technology to keep production working 24-7 but that technology is also not cheap (labor groups usually oppose the adoption of these technologies while demanding higher wages).
With all this in mind, it's possible the FED may acknowledge that higher inflation will be around for some time as we work through this massive transition. Will they keep rates elevated or continue to drop them? Can you isolate yourself completely from the rest of the world? Impossible!
