Are we in an inflationary environment? Some would say that inflation is low. The government is reporting the consumer price index increased 1.6% over the past year. So perhaps inflation is low.
I have a different view. Inflation is partly driven by rising prices. But in fact, the larger factor in allowing prices to rise is the availability of money. Let me ask you a simple question:
If your income doubled,
If you answered yes to any or all of the above, then your food costs went up, your automotive costs went up, and your housing costs went up. None of this was driven by increases in prices. It was driven by the increase in the money supply. When the government prints money, they're increasing the money supply. When banks print money through bank leverage, they're increasing the money supply.
When the balance of international trade is such that dollars accumulate overseas, that money remains outside our domestic economy. However, when enough of it accumulates, some of that wealth comes back into the economy. Foreigners buy companies in North America, and they buy real estate. When they do, prices in hot markets like Toronto, Vancouver, San Francisco, Portland have seen huge increases in real estate prices. That is a form of inflation.
What's the impact? Prices rise, values don't. The utility of the house hasn't changed. The increase in price means the appraised value will go up. The increase in price benefits the owner, not the lender, not the mortgage holder. Inflationary markets are like a game with a different set of rules. If you're playing the game to the wrong set of rules, you'll lose. If you're playing by the rules of an inflationary market you can win.
What happens when there is inflation? Savings are devalued. Debt is devalued. How would you structure your business differently if you knew the new rules?