Transitory Inflation?
- Ishfaaq Peerally
- May 28, 2021
- 2 min read
⚠️ The inflation rate is currently at 4.2% which is the highest in years with the Federal Reserve System, The Fed, telling us that it is just transitory inflation from an 𝙤𝙫𝙚𝙧𝙝𝙚𝙖𝙩𝙞𝙣𝙜 𝙚𝙘𝙤𝙣𝙤𝙢𝙮. Is it? or things are just going to get worse?
Last year, CPI (Consumer Price Index) fell as a result of falling demand and a recession. Now that the economy is recovering and demand is increasing, it is natural that compared to last year, inflation is going to be higher since inflation is just the annual change in CPI.
🚚 Another reason why we're seeing higher inflation is because of a 𝙙𝙞𝙨𝙧𝙪𝙥𝙩𝙞𝙤𝙣 𝙞𝙣 𝙨𝙪𝙥𝙥𝙡𝙮 𝙘𝙝𝙖𝙞𝙣. Supply cannot meet demand for many commodities such as semiconductors, lumber and copper $COPPER . Let's not forget oil $OIL . Last year prices went negative. It is obvious that from there, we will see higher inflation.
💰 This inflation may be transitory but the inflation from the increased money supply by the Fed is not here yet. M2 Money supply increased by 25% last year and all that money went into the stock market $SPX500 . When that money flows back to the real economy, that's when we should be worried. We are seeing more and more regulations and taxes are expected to increased, hence, bringing all that extra cash into the economy. 𝙒𝙚 𝙘𝙖𝙣 𝙚𝙫𝙚𝙣 𝙝𝙖𝙫𝙚 𝙨𝙤𝙢𝙚𝙩𝙝𝙞𝙣𝙜 𝙬𝙤𝙧𝙨𝙩 𝙩𝙝𝙖𝙣 𝙞𝙣𝙛𝙡𝙖𝙩𝙞𝙤𝙣, 𝙨𝙩𝙖𝙜𝙛𝙡𝙖𝙩𝙞𝙤𝙣. Stagflation is low economic growth with high inflation.
All of this are only multiple possible scenarios. Nobody knows exactly what will happen. As value investors, we need to keep focusing on real fundamentals of businesses. A good business will do great no matter how the economy is doing. Of course, some sectors are more affected by inflation, that's why it is important to be properly diversified.
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