American Inflation shoots to 2.6%
If you look up the definition of inflation on the internet today ….
Inflation is the rate at which the the value of a currency is falling and consequently the general level of prices for goods and services is rising.”
In more simpler terms “Too much money chasing too few good.”“
We are seeing the inflation across all asset class and commodities. So what are some of the best assets class coming out of the inflation ?
Equities aka financial asset price inflation -S&P 500 closed at record high at the time of writing , up 45% YTD and stock prices are record high up 60-80%.
Even though sectors like travel, airlines, hospitality, food and services were the hardest hit , we are seeing record rise in stock price on the hopes people will start traveling, and with trillions are dollar printed and American households record saving in bank accounts (thanks for stimulus check ) we will see surge of spending in coming years. Investors will be looking at 30-40% returns over the next 24-36months.
2. House prices inflation - US housing prices are all time high with highest rate of 11% YoY increase since 2006. All major parts of the country seeing record increase vs last year. With housing inventory at record low (1 month of inventory in most major cites ) and lumber prices more than tripled over the past year (188%) home affordability will be an issue for most millennials. In a new Urban Institute report, researchers found that if the country continues down the same road, over the next two decades the US homeownership rate is set to decline to 62.1 percent. They project the overall homeownership rate will fall from 65 percent in 2020 to 62 percent by 2040.
3. Commodity price inflation - raw material and agriculture products likes beef, oil, grains , natural gas etc are rising, CPI (consumer price index) rose 0.6% in March from the previous month and 2.6% from a year ago, according to the Department of Labor. Gasoline prices were the biggest contributor to the monthly gain, surging 9.1% in March and responsible for about half the overall CPI increase. Gasoline is up 22.5% from a year ago, part of a 13.2% increase in energy prices. Oil is the most essential commodity in the world right now with Russia’s recent actions have plunges the oil prices so low that American shale companies are operating at a loss. In addition to that oil will see pressure from electric vehicle industry. It is unlikely oil will see $100 a barrel again but it is also unlikely oil will continue to trade below where American shale companies can not be profitable. With travel picking up, I expect gasoline will be considerably more expensive than last year. Lately crude prices have been soaring — because OPEC has been slow to boost output again. With Fed expected to run the inflation higher until its satisfied they’ve achieved avg. inflation be ready for higher grocery bills.
Inflation rate - G20 countries
4. Crypto/Bitcoin - Bitcoin and cryptocurrency’s have been on tear lately up 800% in the past year…traditionally flooding the market with more dollar have forced investors in the past seek refuge against inflation hedge assets like precious metals, real estate and commodities but recently Bitcoin has emerge hedge against inflation. As we see high level of QE, we will see investors seeking out more bitcoin and gold for protection. At the time of writing bitcoin is up 880% @ $64,000. Another biggest factor that will drive the bitcoin price in future is its scarcity called halving which will cut the supply of bitcoin by half leaving less supply of bitcoin. In other crypto news biggest crypto exchange Coinbase went public via direct listing on Wednesday making it a $86 billion value company on fully diluted basis and his founder Brian Armstrong billionaire over night.
Conclusion :
The questions is not if inflation is here, the real question is when will this inflation will come back to bite us ? Today you see stock portfolios up, home values are up and lot of Americans are enjoying it, they think they’re lot richer. The problem is when inflation causes your cost of living to go up , when it make food, clothing, energy and healthcare more expensive and I believe we’re about to experience those problems sooner or later. With over $5.3 trillion in stimulus has been passed with more to come, government deficit in the most recent month of march 2021 is $660 billion and that’s just in one month which used to be large deficit for an entire year. Just a year ago it was $119 billion. Total tax revenue for march 2021 was $268 billion , in other words for every $1 govt. collected in tax they spend $3-4 dollars, 70% of govt. spent was borrowed and only 30% covered by taxation. The only reason we can run $660 deficit is because of printing money. The public will be going to have to pay for this spending, if not by tax increase, it will be paid by inflation. In the short term we can import things to keep up with the demand but there is limit to how much we can import. We are consuming more than we produce and if we shower everyone with money, prices has to go up, you can’t create purchasing power by printing money, you create it by producing goods. The US trade deficit surge to a record high in feb to a $71 billion and export dropped 2.6%.
In closing with Fed explicitly stated that they want higher inflation and will maintain 0% interest rates and trillions in bond purchases for next few years to come in an effort to achieve that goal I believe we will see continued asset prices go up. Please don’t take anything written here as financial advice, nor as predictions for what is to come. It is my personal opinion as of today and you should do your own research, never invest more than you are willing to lose, and consult a financial professional if you need advice.