Inflation – Is It Behind Us?

Around this time last year, inflation started to rear its ugly head in earnest.  “Transitory” inflation was gaining traction.  Over the next 12 months, prices jumped big time, and the Fed responded with interest rate hikes to slow the economy.  We are seeing signs of the economy cooling: layoffs and some corporate downsizing, and mixed news on inflation.  There are multiple economic factors at work on price levels.  At this point, have we seen the end of interest rate hikes and price spikes?

Are we there yet?

The economy is slowing, as actions by the Federal Reserve are having the intended effect.  However, monetary policy only goes so far, and it won’t impact energy or commodity costs that are also driving the current inflationary cycle.

This month the Fed raised interest rates for the sixth time this year. This 0.75% bump in the Fed Funds rate (the interest rate at which banks lend money to each other overnight) trickles out to affect other interest rates, such as those that pay you interest on the cash in your bank accounts, and those that cost you more on the debt you have if the rate is variable, like credit cards, HELOCs and other variable rate mortgages.


By now we’ve all seen higher prices at the gas pump and in the grocery store. Inflation is an increase in prices for goods and services, and one way to help stop the cycle of too much money chasing too few goods is to raise the cost of money.  Interest rates are the cost to borrow money. Make it more expensive to spend money, and in theory you slow the cycle of price increases.  Inflation falls.

Inflation isn’t always bad; the Fed targets annual increases of 2% and calls it price stability.  In fact, prior to Covid-19’s appearance, markets had been fretting over deflation, falling prices. When prices are falling, people put off purchases, your boss forgoes cost of living increases for your team, and if prices for what you’re selling decline, your sales revenue falls and you may have trouble managing your fixed costs, like mortgages and other loans.


Some are blaming government spending, others are pointing to supply shortages from the war in Ukraine and Covid-19 lockdowns in China, still others are pinning fault on climate change – the response to it, or lack thereof – since energy prices ripple out as inputs into almost every good you can buy.

But inflation has been ticking up for a while.  Around this time last year, things started to get real when the inevitable bumps of coming out of the pandemic hit the chocolate market.  My favorite chocolatier, Jean Thompson, CEO of Seattle Chocolate, emailed a video message noting that her company was experiencing some ingredient shortages that were delaying their usual production of crazy delicious chocolate.  Jean noted the string of issues creating their sourcing issues: plant shutdowns during Covid, followed by labor shortages and transportation delays.

In just a few minutes, she outlined the supply chain difficulties we are continuing to experience worldwide, and how that has led to some wonky prices. The Seattle Chocolate experience outlines some of the issues that factor into price levels, and what can cause prices to rise. (At this writing, prices on their truffle bars are holding steady.)


Some of you might remember the buttons the Ford Administration was handing out in 1974 to fight inflation (it hit 12.3% that year).  The buttons shouted “WIN,” for Whip Inflation Now.  This slogan was a pivot from the initial campaign, Stop Inflation Now.  Which spelled SIN.

The effort to encourage personal savings and curtail spending amid the fallout from the 1973 oil crisis, instead of using government intervention, failed miserably. (However, in an attempt to save energy, we did get both the national 55 mph speed limit and year-round Daylight Savings Time, which lasted until 1976, repealed after parents complained about kids leaving for school in the dark.)

It’s reported that skeptics of the WIN campaign wore the buttons upside down to spell “NIM,” meaning No Immediate Miracles.” We are sort of in this pickle today.

One of the wrinkles in the use of monetary policy (using the money supply to control economic growth, raising interest rates to slow it and lowering them to help it along) to fight inflation is that this tool only controls money.  It can affect the supply and demand for goods, but there could be other factors at work that will make monetary policy less effective.


Economics outlines two main types of inflation[i]:

Cost-Push Inflation
Demand-Pull Inflation

COST PUSH INFLATION comes from the producer’s perspective: the cost of the good or service increases because it gets more expensive to produce.  This happens when raw materials or labor get more expensive, and the producer’s increased cost can be passed along to you in the form of higher prices.  Viola  – inflation!

Chicken and beef prices surged early in the pandemic in part due to higher costs from retrofitting factories due to Covid to raising wages so they could hire enough labor. Drought in 2020 impacted cattle herds then, too. Prices have also remained high because of limits on production by the four Big Meat producers[ii].  Call it a Meat Monopoly. A Chicken Cartel.

DEMAND PULL INFLATION comes from the consumer: You have more coin rolling around in your pockets and so you want to buy something. But so does everyone else.  More people want the same thing, and so its price goes up.

The general re-opening of the economy early last summer saw restaurants, bars, theatres and other performance venues ramp up business to meet the pent-up demand from all of us for some version of normal. Last September, retail sales bumped up, as we started to think about clothes for the office, back-to-school buys, and holiday shopping.

In general, those blaming government spending are saying it’s more money given to people to spend and those big raises workers have been winning that is the root of our current inflation troubles: It’s this extra money that is resulting in demand-pull inflation.

Those looking at the war in Ukraine and Covid-19 lockdowns in China that are limiting the supply of goods would say those factors are causing inflation today, it’s cost-push inflation.

In truth, these constructs are imprecise, and there’s overlap in how markets for goods and services equalize across the push-and-pull of disruptions.  It’s less likely that government spending is the source of inflation now; most of that money has been distributed and spent already – it helped individuals keep food on the table and businesses to retain workers on the payroll during the economic shutdowns early in the pandemic. It helped keep stock prices up. It also does not account for global inflation, which US government spending would not impact.

Wages have risen about 5.0% since September 2021 according to the Bureau of Labor Statistics, while inflation has been higher than that. The new spending committed through the Inflation Reduction Act, which only passed in August 2022, hasn’t hit markets yet, so that is not central to the current crisis.  It’s also true that some supply shortages have been due to private sector (corporate) miscalculations about buyers, buyer behavior, and how the pandemic would play out for both demand and supply of goods.


For all the talk of “prevailing levels” of interest rates and inflation, the impact you feel boils down to your ability to absorb higher prices for the goods and services you want.

Core Inflation is based on a generic the basket of goods you can buy — but leaves out food and energy.  This is the inflation measure for you if you don’t eat or want to be warm in winter. Core inflation is not intended as a consumer measure as much as it is a macroeconomic barometer; prices of things go up and down all the time, sometimes seasonally, and the Fed and others don’t want to be tying their long-term strategies to short-term changes in prices. So looking at core inflation works for the Fed in setting policy.

The Consumer Price Index (CPI) is closer to your experience as a consumer.  The CPI is based on a basket  of goods that includes eight major groups of items: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services.

But even the CPI basket of goods is an average for an average household and may not reflect your personal rate of inflation.  If you spend above average amounts on medical care, for example, your experience of price changes may be different.  If you use solar power for heating your home, and fuel prices are rising, your personal rate of inflation will likely be lower than the prevailing rate.


  • Retirees – Over 50 million Social Security beneficiaries, and military and Federal Civil Service retirees, have cost-of-living adjustments tied to inflation. For 2022, Social Security beneficiaries saw a 5.9% increase, and for 2023, benefits will increase 8.7%.  It was after the inflation spike in 1973 that the Social Security Act of 1935 was amended to establish automatic cost of living increases annually.
  • Lenders (all of you with savings accounts and money market funds) will see higher returns. It might be pennies, but interest earnings on these accounts will start to nudge up. Holders of I-Bonds (Series I US Savings Bonds) are having a field day with higher rates – Current I-Bonds are paying 6.89%.
  • Companies that can reset their prices, especially for goods that have low price sensitivity (goods you need to buy at whatever price – like diapers for the baby, food, fuel) and Investors in said companies:
    • Energy producers – Oil companies do not control oil prices (OPEC+ does), and while oil companies are making the same profits they were before the war in Ukraine, they are now making profits on top of those profits, since their costs haven’t changed but they passed along the higher prevailing market price to you. A bill to levy a Windfall Profits Tax on energy producers was introduced this Spring, and was immediately quashed by Republicans in Congress.
    • Supermarket chains – When the price of your favorite brand goes up, you can switch to a generic or store brand. Chains that market a house brand for consumer staples win either way you go.

In earnings calls this year, both oil producers and supermarket conglomerates bragged about profits never being so good. [1][2][3][4]

  • Taxpayers – Our federal income tax system also uses the CPI to make annual adjustments. For 2023, tax brackets have swooned along with rising prices, and you could find yourself paying less tax next year, all things considered. In addition, eligibility criteria for millions of food stamp recipients, and children who eat lunch at school, are affected by changes in the CPI.


  • Borrowers will see higher costs if you have variable rate debt. Even in the market for fixed rate debt we are already seeing mortgage rates rising (though still at historic lows).
  • Working folks continue to absorb the additional cost of production; despite gains in productivity, their wages have barely budged. Profits are going to pay investors first, not workers. BUT you have another arrow in the quiver if you are targeting a raise in an upcoming performance review.  In addition to the other value you are adding to your company, your cost of living is going up.

The real question is whether prices will continue to rise over the long-term, or if current higher prices are due to temporary conditions, shortages, supply chain issues and the like.

Watch for how inflation can show up in weird and unexpected ways, such as:

  • Candy Bar Inflation – When the wrapper for the Snickers or Abba-Zaba is the same as always, as is its price, but the candy bar inside is just a tad smaller.  The bar looks to be the same size, and the price is the same.  But you are getting less gooey goodness for the same money. Inflation! (aka Apple Bag Inflation: while there used to be eight apples in the bag for $6.99, now there are seven.)
  • Latte Inflation — When I was at Starbucks, retail operations changed the menu boards.  When you look up at the board to select a drink, you see three columns: Short, Tall and Grande.  The new boards now displayed Tall, Grande and Venti.  Each size added 4 ounces to the drink, with an associated bump in price.  What Starbucks found is that people are creatures of habit: they order the drink in the same column.  If you had ordered a Tall off the old board, more than likely you would order a Grande off the new one.  Starbucks increased its sales and profits. You got 4 ounces more coffee, but you paid more for your Third Place experience at a cafe. Inflation!
  • Dressmaker’s Inflation — Most women have probably experienced the variation in sizes between different brands.  Often, the higher cost brands offer more generous sizing.  The story told in the trade is about a dressmaker who discovered that by crinkling up a dress pattern, then smoothing it out again before cutting the material, resulted in a dress that was just a smidge smaller that the pre-crinkled pattern would produce. Multiply that by many dresses, and the dressmaker saves a bolt or two of fabric.  You pay the same price for each dress, but it means that post-crinkled pattern Size 10 fits you just a little tighter. Inflation!

Sneaky pricing aside, it’s not likely we are done with inflation yet.  Energy is a major input into almost every good in the market, and between OPEC+ and Russian control on global energy supplies, we could expect price increases to wane, but not to decline much just yet.

In the meantime, Seattle Chocolate is working hard to source their fine ingredients from other vendors so that we all will have chocolate to give and get for the holidays.  But you might want to stock up on your favorites when you see them.







[i] Federal Reserve Bank of SF Ask Dr. Econ forum: What are some of the factors that contribute to a rise in inflation? Accessed oct 18, 2021.

[ii] High Meat Prices Are Helping Fuel Inflation, And A Few Big Companies Are Being Blamed, Scott Horsley,, Accessed Oct 18, 2021.