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Inflation in The U.S. Economy: Its Three Victims Investors Must Know Lombardi Letter 2017-12-12 23:13:56 Inflation US economy investors bonds market Inflation could become a problem for the U.S. economy in coming years. Here are three victims of inflation investors need to know. News,U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2017/12/Inflation-150x150.jpg

Inflation in The U.S. Economy: Its Three Victims Investors Must Know

U.S. Economy - By |
Inflation

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List Of Inflation Indicators Flashing Red Gets Bigger

Going forward, its very important to keep track of inflation in the U.S. economy very closely.

If you look at the inflation indicators in the U.S. economy, we see a lot of them are flashing red and suggesting prices in the U.S. economy could be soaring going forward, and sadly, the list continues to get bigger. Be very careful.

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Consider the Producer Price Index (PPI). At its core, it shows how the prices look at the production level–think businesses and manufacturers.

In November, the PPI increased by 0.4% from the previous month. In the first 11 months of 2017, prices increased by 2.6%. (Source: “Producer Price Index News Release summary,” Bureau of Labor Statistics, December 12, 2017.)

How significant is this? Well, last time the PPI rose by over 2.6% in the first 11 months of the year, it was back in 2011.

Why does the producer price matter? Let’s get this straight: businesses pass the cost increases to customers. So if there they are seeing their prices increasing, don’t be shocked to see it show up in the consumer prices.

If you want to know about other inflation indicators, I wrote about few not too long ago, read here for more.

3 Victims Of Inflation Investors Must Know

If prices are about to jump in the U.S. economy, there are three victims investors need to know:

  1. As inflation soars, consumption tumbles. Each dollar buys less than before. Keep in mind that consumption makes up roughly 70% of the U.S. gross domestic product. Also, as prices soar and incomes don’t rise, we get all sorts of different problems at hand. Economic growth could be on the line.
  2. Inflation is essentially a tax on corporate earnings. When prices are rising, companies end up taking a hit on their profit margins. There’s a limit to the costs they can pass on to customers. If the customers can’t pay, they end up absorbing costs. Will they hire a similar number of employees if their profits tumble? Will their stock price remain the same or collapse?
  3. Inflation is bonds’ biggest enemy. If bond prices tumble and yields increase, this could create trouble across the bonds market. Remember that the U.S. bonds market has amassed to $39.0 trillion. And that’s not all; bond yields soaring would mean businesses and consumers’ borrowing costs surging.

Dear reader, as it stands, the Federal Reserve is on track to raise rates, and there’s a lot of confidence among investors that inflation won’t get out of hand. However, don’t ignore the money that’s been printed over the years; we have seen immense monetary inflation. It could really start to show up in prices sooner than later, and we could really be looking at inflation running at five percent in the next few years.

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