Who would have known 18 months ago that inflation would be one of the biggest concerns in boardrooms, on Main Street, and for our farms and ranches? After years of stable prices and even possible deflation risk, the opposite end of the spectrum is now reality.

Since March 2021, core inflation, excluding food and energy prices, has jumped from 1.6% to 4.6% annually. Headline inflation, which includes food and energy, has risen from 2.6% to 6.2%. However, the Producer Price Index has increased from 4.2% to a staggering 8.6%. Senior citizens on Social Security will see average payment increases of 5.9%, which is one of the highest increases since the 1980s. While an increase in Social Security payments is positive for older Americans, the downside is that cost increases for food, medicine and healthcare have outpaced cost of living adjustments.

What should be on the inflation watchlist over the next few months to determine whether this inflationary environment is temporary, permanent or, as the Atlanta Federal Reserve Chairman says, “episodic”? That is, certain variables, such as fiscal and monetary policy, as well as supply chains, make inflationary conditions behaviorally tied to these elements. Let’s take a look at my inflation watchlist.

First, keep an eye on the price of oil. Who could have imagined going from negative oil prices in the spring of 2020 to now approaching $90 per barrel? The focus and incentives for green energy sources has also created disincentive to invest in fossil fuels. Compounded by the increased global demand for fossil fuels, these factors have played into the hands of OPEC and Russia. These oil-producing regions now have production power and control pricing. Historically, it was wars and skirmishes that brought increases in oil prices. Now, policy and geopolitics are creating risk that could potentially lead to a recession because of weakening consumer confidence. Of course, agriculture will experience the brunt of these changes because many production expenses are tied to the oil and energy complex such as fuel, fertilizer and other inputs.

Very closely monitor the Index of Consumer Sentiment, published by the University of Michigan. Consumer spending drives 70% of the U.S. economy and 55% to 60% of other major economic powers. In recent months, this number has been in the low 70s, rather than the high 80s and 90s, which would illustrate consumer confidence.

Another factor to consider is the recent slowdown of the Chinese economy. Growth has fallen from 7.9% to 4.9%. Real estate, which drives 29% of the Chinese economy, has seen a significant slowdown and devaluation. Lost investments in housing, which over 90% of Chinese adults have some form of investment in, has rocked consumer confidence in the second largest economy in the world. Will these real estate issues ripple through the global economy? Only time will tell.

Of course, supply chain issues are not going away for the next few years. Bottlenecks will create episodic inflation, as previously discussed. A shortage of truckers and other frontline workers connected to distribution is a cost and issue that is not quickly resolved. The regulations placed on trucking by the government accelerated retirements. Often, the next generation is not aligned with the demands and work-life balance of the trucking industry, which is creating a supply and demand imbalance in this industry.

The bottom line is that you must expect inflation throughout all expense items when doing cash flow projections for 2022 and 2023. The question becomes, will the volatile prices received be enough to cover costs?

Dr. Kohl is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University. Dr. Kohl has traveled over 8 million miles throughout his professional career and has conducted more than 6,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FSA and regulators, as well as producer and agribusiness groups. He has published four books and over 1,300 articles on financial and business-related topics in journals, extension and other popular publications.

© Northwest Farm Credit Services 2021