Post #908 – December 13, 2021

The Truth is Starting To Come Out – Beware a 2022 Inflation Tsunami


While firms may experience a prosperous 2021 and looking for more of the same going forward (it's been forecast that in 2022, law firms will push hard for double-digit rack rate increase), inflation is roaring at a pace not experienced in most people’s lifetimes. Saturday’s WSJ front page screamed that inflation is NOW the highest in 39 years. Last week’s Corporate Board Survey shows deteriorating C-Suite sentiment, expecting lower growth and higher interest rates. And, the definition and method for calculating inflation has deceptively changed over time in ways that obscure this issue. 

What do I mean? Well, the former definition focused on the amount of currency being created, the source of inflation; whereas the latest definition focuses on rising prices, which is more a symptom of inflation. Meanwhile the FED has quietly increased the money supply for over 70 years without it showing up too much in increasing prices . . . until NOW.  Since inflation is measured by changes in the Consumer Price Index, an index that tracks the average price of a basket of goods and services we purchase, the precise method of doing so has also changed. I’m told that if inflation were calculated the same way today as it was in the 1970s, our inflation rate would currently be CLOSER TO 15%!

Keep in mind, Governments have an incentive to understate inflation. Since pension entitlements and welfare payments are often indexed to inflation, understating the true rate of inflation can help government reduce its financial liabilities. 

For the US economy, run-away inflation could eventually be devastating, producing a deep economic recession. America is awash in debt, and higher rates will place many borrowers in financial distress. US government debt currently stands at around $29 trillion; while US corporate debt stands at over $11 trillion; and the combined debt of households and non-profits is currently in excess of $17 trillion (as if any of us really understood what a trillion dollars represents). And since the US dollar is the global reserve currency, most attention has been focused on the American situation. However, we need to understand that high inflation is a global trend and therefore could cause a severe economic contraction as interest payments rise and spending falls.

Contemplating action sooner rather than later, before everybody wakes up to the real threat posed by inflation, may allow you to position yourself.  You need to ask: 
- How will we manage rapidly rising costs across most elements of our practices from travel to in-office expenses?
- How do we ensure that we retain our best talent without incurring more double-digit compensation cost increases?
- Is our strategy (which client industries we serve, what specific services we provide and why they choose us) still sound for 2022 and beyond?

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