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June 10, 2022

Why inflation is not fun

Natural inflation is healthy thing. Various sources claim a yearly inflation around 2% is perfectly fine and healthy for the economy. Assets slowly get more value, money slowly devalues - everything is normal and as expected.

However in situations like today, when we experience overwhelming inflation that was caused by pandemic, supply problems and excessive money supply to keep economy afloat + recent price hikes for energy sector caused by multiple things including war between Russia and Ukraine (war in 2022? unthinkable!) - we have to acknowledge that current inflation is quite bad and has to be stopped or slowed down as fast as possible.

Some can truly confirm that most of salaries was raised during last year: if you didn't have a substantial raise you're probably having a bad job. Median number is somewhere between 4.5% and 5% yearly raise year over year; however these raises, while positive for workers and families are not in a direct correlation with inflation.

According to latest report released today, CPI (consumer price index) indicates year over year inflation of 8.6% in May, even more from April numbers of 8.3%. That's quite concerning, considering the fact FED already started rate hikes and quantitative easing.

money becoming worthless by 8.6% year over year currently

It's really no fun to see your money become over 8% worthless in just a year

A little bit more of rate price hikes in simple words: when FED wants money to become harder to obtain (thus reducing inflation, inflated prices, etc.) they hike the rates. That means all types of loans are becoming more expensive = harder to obtain. A lot of businesses, even most successful ones depend on borrowed money. When borrowed money become more expensive a lot of businesses shrink their operation, reducing labor and introducing layoffs.

A lot of businesses rely on such a cheap debt they can't even stay afloat and forced to close. By the way, mortgages are also affected by this: rate hikes make purchasing homes quite less affordable.

However rate hikes are absolutely necessary when we have a 40-year high inflation to keep things in control: however we can expect some short time difficulties, price hikes, overall purchasing slowdown.

This affect all chains of our furniture niche businesses as well - furniture is essentially, luxury good, and luxury good demand plumets in times like this, which is to be expected. In times of economic slowdown and higher prices people tend to buy only goods that are 100% necessary.

Inflation can be really hard to price right. For example, in furniture there are few chain members that need to price costs for at least some time (months) ahead - and with inflation like this it's very hard to do right. This may lead to overestimation of costs / expenses thus even further hiking the final price to a consumer.

So, it's not fun for anyone. Despite ~4% salaries increase, we have soaring gas prices plus over 8% inflation (again, this is median number, in some areas inflation is even higher) - it's very hard to keep up with. With rate hikes we just have to wait until everything will start to get back to normal.

It will 100% come but maybe it'll take slightly longer than initially anticipated.

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