No doubt many of us would feel extremely anxious as if something bad was about to happen. But do you understand what’s going on, and is inflation as bad as you think it is?
What is inflation?
Inflation is the continuous increase in the general price level of goods and services over time and the loss of the value of a currency. When the general price level rises, an amount of money could buy fewer goods and services than in the past, so inflation reflects a decrease in purchasing power per unit of currency.
What is the cause of inflation?
Economists have identified two basic causes of inflation. The first is a rapid increase in the actual amount of money in circulation (supply). For example, when European conquistadors conquered the Western hemisphere in the 15th century, gold and silver bars flooded into Europe, causing inflation.
Second, inflation can occur due to a lack of supply of a particular good in high demand. It can increase the price of that good, which in turn affects the rest of the economy. The result is likely to be a general increase in the prices of most goods and services.
Why does inflation matter?
Inflation can have both positive and negative effects on a country’s economy and consumers’ finances.
If inflation picks up in 2021, it will be welcome initially as it is a sign that economies are recovering from the pandemic. Even in Japan and the Eurozone, policymakers will feel relieved that they have come out of deflation.
Negative aspects of inflation
While inflation is understandable for economists and government officials, it is also important to ordinary people for a variety of reasons.
Inflation affects the most vulnerable people in a country – the poor and the elderly – and also reduces the real income of the working class.
Inflation causes interest rates to rise and reduces the value of savings. People who have spent years saving money for education or retirement will find the purchasing power of that money reduced significantly.
Positive aspects of inflation
While inflation is often very harmful, it can have some positive benefits.
First, inflation can stimulate a country’s economy. When there is more money in circulation, that means more money to spend, thereby creating more demand. This helps boost production, reduces unemployment, and puts more money into economic activity overall.
Second, inflation helps counter a danger to the economy known as the “Paradise of Savings”. This is a term coined by John Maynard Keynes, a famous 20th-century economist.
The term refers to a consumer’s tendency to delay purchases of goods when prices fall during periods of deflation. As you can see, inflation works the opposite way of deflation – it reminds consumers to buy goods and services quickly before their prices rise further.
Is the US now inflationary or not?
Ever since Democrats proposed a $1.9 trillion fiscal stimulus package in January, US political hawks have warned that the US economy may be overheating.
But the Biden administration continues to roll out massive stimulus packages. Larry Summers, former Fed chair, has just issued a warning that there is a high chance that the economy will be affected by high inflation or by the impact of higher interest rates.
Official figures show that prices from basic goods, industrial goods to real estate have skyrocketed. Inflation is coming very close, not just a problem to be studied.
However, even though the keyword “inflation” has covered the US newspapers, even though it seems that all signs are leading to inflation, in reality, inflation occurs only when The Federal Reserve System confirms
So what did the Fed say?
In recent decades, the Fed’s control on inflation expectations seems to be harder. Even in 2019, when the unemployment rate fell to a depth not seen since the 1960s, inflation expectations remained largely unaffected.
In theory, that makes fluctuating inflation is only temporary. “But I do think it’s more likely that what happens in the next year or so is going to amount to prices moving up but not staying up and certainly not staying up to the point where they would move inflation expectations materially above 2%,” said Jerome Powell, Fed Chair.
In a speech at the Brookings Institution, Fed Vice President Randal Quarles said the current high levels of inflation were unlikely to become a persistent threat to the US economy and called for the Fed to act soon. could impede the economic recovery after the COVID-19 pandemic.
Which sector should investors choose to get the most profit when inflation occurs?
Gold is considered a haven when the economy contains many uncertainties and the risk of high inflation. Because in fact, Gold is the only means of maintaining and storing wealth for thousands of generations. And of course, this is something paper money cannot do. When investors realize that their money is losing value, they will start to turn to invest in physical assets that will always maintain their value, and that is gold.
In general, if the economic crisis is not controlled, the gold price is likely to increase. However, when there are positive signals about the economy, the price of gold may decrease. In times of crisis, you should invest in buying gold in bulk when the price is low, if the price of gold is high, you should still buy it but in a moderate amount. At the same time, it is necessary to update the news regularly, accurately assess the prospects of the economic crisis to take the right step with the amount of gold purchased in reserve.
This is a very popular and long-standing investment channel in the world. Nearly 100% of Americans own stocks. In which, more than 50% of Americans own securities directly.
In principle, stocks are a good hedge against inflation. Business results depend on consumer prices, and stock prices reflect that outcome. In some cases, stocks are even the only “haven” to avoid inflation.
However, the fact that in the short term, inflation and stock prices can completely have an inverse relationship. Rising inflation can cause stock prices to fall, and vice versa.
3. Real Estate
In theory, inflation and the housing market usually do not have a direct relationship. Its connection is reflected in monetary policies, the state of the economy, and people’s psychological expectations.
High inflation is often a manifestation of excessive money supply, poor economic performance, or an increase in the prices of world goods. The rise and fall of the housing market are closely related to the money supply in the economy, foreign investment flows, psychology, and speculation.
Thus, between inflation and the prosperity of the housing market, we see that there is a common factor that is monetary policy. When monetary policy loosens and interest rates are low, people and businesses borrow more money. This means that money will pour into the real estate investment channel, making this market prosper.
In addition, when money is pumped a lot into the economy, it also makes the economy grow faster. At that time, people are usually optimistic and they will invest heavily in the housing market with the expectation of making a quick profit.