The trouble with resuming fast growth is that there is fast growth. When growth slows, we all know what happens–layoffs as fewer people are needed, inventories build up, capacity goes slack and generally we see prices fall with the decline in demand. The reactions to rapid growth are just as predictable. There is suddenly a need to hire people, inventories are used up and shortages develop, capacity utilization exceeds normal levels and there is inflation as that demand overtakes supply.
This is where we are now. Generally speaking, this is a short-lived phenomenon as producers are drawn into the market by that demand and soon everybody is trying to expand their market share. As the demand starts to get satisfied the producers look for ways to keep the party going and that is when prices start to fall.
This year there has been another dynamic in play. The world is sitting on over $5 trillion of excess savings due to all the stimulus money that has been flowing from government. This has meant that higher prices have not been the problem they usually are–people are complaining about the hikes but they are paying them anyway.
When do the shortages and the higher prices end? The reality is that there will be changes on both counts and fairly soon–by year’s end for certain. The first development will be the arrival of competition among consumers to meet this extraordinary demand. This period is an open invitation for companies to expand and to look for ways to meet this need since prices and demand are high. The second big change is that consumers will blow through all that extra cash within the next few months and that price sensitivity will return. They will be unable or unwilling to pay the higher costs.
These two factors will drive prices back down. The fact is that prices will not return to the levels seen in 2020–these were recession prices. The price norm and the supply norm will be similar to what it was in 2019.