For all those saying inflation is over, don’t worry! There are 7 more years of it.
Kristalina Georgieva, the International Monetary Fund chief, said that there is a risk of a more sustained rise in inflation or inflation expectations, which could potentially require an earlier-than-expected tightening of U.S. monetary policy.
This is after the Fed brought forward its expectations of rate hikes last month.
Over the last year, the costs of many products have gone up faster than they have in decades. But even if the inflation surge is temporary, it could raise inflation expectations, and that could have a long-term impact on the level of inflation, interest rates, economic growth, and markets.
Except for the period when gasoline prices surged in 2008, inflation is now rising faster than it has in nearly 30 years. The sudden reopening of the economy, propelled by massive government support, created enormous increases in demand, while supply chain and labor constraints limited output.
This classic demand-exceeding-supply inflationary environment has provided businesses with significant pricing power.
Most likely, the current inflation acceleration will moderate over the next year. Businesses will have more time to adjust output, while the government’s payments to households and businesses will largely disappear, moderating sales. Supply and demand will become more balance.
That is years, if not decades, away.
And then there’s a bigger problem – inflation expectations.
Inflation expectations are what households and businesses believe the rate of inflation will be over time.
Expectations of how costs will increase are crucial factors in business and household decision-making. If a business thinks its costs will rise by a certain level, it will need to find ways to cover those added expenses. It will look to improve productivity, but it will also likely need to raise prices.
On the household side, inflation affects purchasing power. People can spend their income now or save it and buy goods in the future. The higher the rate of inflation, the less that can be bought in the future. As inflation rises, spending gets shifted from the future to the present.
And, finally, interest rates could be affected. The rate that financial institutions charge for loans depends in part on the need to offset inflation. Their buying power is negatively affected the same way as households, and they need to cover that potential loss. The higher the expected rate of inflation, the higher the loan rate.
The implication is that we need to watch not just the rate of current inflation, but what is happening to expectations about what inflation may be over time.
And inflation expectations are on the rise.
The problem is that the government isn’t giving people reasons to believe inflation is in control.
Aside from making us believe inflation is only 4% and it’s temporary, nothing much has changed. Prices are going up. GDP is going down.
The only thing you can do is protect yourself against it.
Reexamine your portfolio. Go to your financial advisor and talk about how you can best hedge against this inflation that isn’t going away anytime soon.
And look into gold. It is the best hedge against inflation, the best store of value.