Buckle Up: 3 Reasons Inflation Is Rising

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Consumer prices are rising at the fastest rate since the Great Recession and at the second fastest rate since the early 1980s. Earlier this year, Fed Chairman Jerome Powell noted that we would experience temporarily a rise in inflation. We are now seeing this to be true. The reasons for this cycle of price increases can be attributed to three main causes.

Reason n ° 1: increase in the money supply

Inflation is more likely to occur whenever there are too many dollars for too few goods. It is simply a question of supply and demand. When the pandemic hit, the Federal Reserve and the Federal Government together flooded the economy with more dollars. How much more? As of January 2020, M2 money supply was around $ 15.41 trillion. Last April, just 16 months later, M2 money supply stood at $ 20.11 trillion, an increase of 30%. While this may have given a boost to the economy and helped avert a deeper recession, it also contributed to a rise in inflation.

Reason # 2: Falling Dollar Value

Anytime the money supply grows too quickly and there are too many US dollars in the system, it reduces the value of every dollar. A weakening dollar increases the cost of imported goods. This is because American companies that import goods must pay more for the same goods. In addition, to maintain corporate profits, companies have had to raise prices, leaving consumers to foot the bill. While a weaker dollar often increases the amount of US exports, it also increases the cost of imports from other countries. The US dollar has weakened since March 2020.

Reason 3: The supply chain

When the pandemic struck, companies sought to maintain production. However, with employees calling in sick with Covid-19, it has become difficult to do so. As production slowed, the federal government shut down much of the US economy and it was no longer necessary to maintain the same level of production. This pushed millions of workers into the ranks of the unemployed.

Many companies import goods and supplies from China, the world’s largest exporter. Due to the pandemic, these companies were forced to find alternative sources for the supplies and products they needed. To sum up, a significant reduction in the supply of goods, coupled with a massive expansion of the US dollar, has led to higher inflation.

Portfolio Tips

What can investors do to consolidate their portfolios? If you don’t have any TIPS (Treasury Inflation Protected Securities), you should take this into account. These are bonds issued by the US government, the price of which will increase with inflation. These instruments also pay interest on a periodic basis. Also, as I wrote in my most recent post, Preparing for the Next Market Bubble: What Investors Need to Know Stocks are still the only game in town, but you need to be careful of the price you pay. pay. Commodities are another investment to consider, but be careful as this type of investment often fluctuates with the economy.

With a massive increase in the money supply, a weakening dollar, and a supply chain just beginning to find its place, higher prices are likely to be with us for a while. While the Walmart
WMT
slogan may suggest that the prices go down, we could say that the higher prices are just the beginning. Hopefully not.

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