Inflationary pressures have put significant strain on worldwide markets, with most of them trending downwards during the early parts of May 2022.
The US is experiencing its largest inflation rate in the last 40 years, with Trading Economics showing an inflation rate of 8.3%. (https://tradingeconomics.com/united-states/inflation-cpi)This will put even more pressure on the Federal Reserve to raise interest rates. With mid-term elections in November, a geo-political crisis in Europe, and strong rhetoric from the GOP, President Biden hasn’t got a lot of room to move.
Inflation hasn’t been limited to the United States, though. The United Kingdom, Germany, France, and Australia are also seeing record inflation rates not seen for 40 years. This places an extreme crunch for consumers as they grapple with a post-COVID world.
What’s been causing the inflation?
There’s no single cause of the current high inflation, but rather a perfect storm of causes that’s created the worldwide phenomenon.
- The world is rebalancing after a post-covid pandemic. While the pandemic is by no means over, many developed nations have been working hard at restoring their economies after a near 2-year shut down, with stop-start lockdowns causing much distress.
- There’s a lot of cash floating around. Stimulus cheques and qualitative easing by central banks have put a lot of cash into the economy. Another cause of excess cash flow is the fact that a lot of people didn’t have opportunities to spend money while under lockdown. Now that things are returning to a form of normalcy people are wanting to spend more. More cash in an economy means higher inflation rates.
- There’s a worldwide chip shortage. Western Nations have not built up a capacity to create advanced computer chips. According to the New York Times 90% of advanced chips are made in Taiwan. Over all 75% of chips are made in Southeast Asia. The pandemic not only caused lockdowns, but the shutdown of manufacturing capacity. Global Economies bounced back faster than these plants could get themselves back online, causing the shortage. This means that electronic goods, cars, spare parts, etc. are all on backorder. Scarcity of goods is another strain on the demand-supply curve, creating more upward inflationary pressure.
- The Great Resignation. As the economy rights itself people are beginning to ask themselves if they’re happy with their lives. This has led to a lot of people resigning from low-skill menial jobs which has caused gaping holes. Fast Food chains in the US, for example, are having to run with skeleton staff on diminished hours because they’re unable to attract staff.
- Supply Chain Shipping woes. China has implemented a rigid Zero-Covid policy, forcing large cities to be put under severe lockdowns. Shipping out of China has come to a crawl, there’s a world-wide shortage of shipping containers, and a shortage of truck drivers in many developed nations. The average vessel wait time at the Los Angeles Port is 20 days (as of 17 May 2022) due to high import volumes and a lack of ground staff.
- Geopolitical Conflict in Europe. The Russian invasion of Ukraine has caused a lot of market uncertainty. Ukraine is a large producer of wheat, which is currently stuck in Odesa, without the ability to be shipped out. This has put severe strain on global food prices, with India banning the export of wheat adding to the mix.
Is there any good news?
Opportunities exist in any market – whether it’s going up or going down. The Guardian revealed that the top 10 billionaires in the world have increased their wealth by $10.2 trillion during the pandemic alone.
It’s all about perspective. Swiss Bank UBS reports that a sizable portion of this wealth creation was due to investors betting on stocks rebounding after their share value dropped during the pandemic. UBS also notes in its report that many of these investments were aggressive high risk, though. Billionaires tend to have significant risk appetite.
But this doesn’t exclude the ordinary trader or investor from using the same methodology in their own investment strategy. Of course, one is always cautious, and one shouldn’t be investing everything one owns in such high-risk trades.
Inflation should never be seen as a depressing negative for the savvy investor. It simply requires a shift in your investment strategy to bolster your results.
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