The rising inflation rate in the United States has hit an all-time high in nearly 31 years. But although Americans may think the prices of food and gasoline will be significantly increased in the coming months – analysts are warning that the lasting effects will ripple through nearly every industry.
In October this year, the chained consumer price index of all urban consumers (C-CPI-U) increased by 0.8%, bringing the national inflation rate up to 6.8%. With the rampant increase, consumers and investors are scrambling to hedge the rising cost of living.
But a report from the U.S. Department of Commerce Bureau of Economic Analysis cited in September by the Federal Open Market Committee predicted that inflation will again fall to 2.2% in 2022. (Editor’s Note: HA!)
With the rising cost of living, American paychecks are stagnating.
Wages have remained the same amid the rapid rise of inflation. With more than 10.4 million job openings as reported by the Bureau of Labor Statistics, job market recovery has been stagnating as Americans are leaving the workforce behind, either temporarily or permanently.
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With low job market supply to continue well into the new year, wage growth will see little changes in 2022 as concerns around the pandemic overshadow job certainty. With more job openings, little has been done to increase American paychecks in an effort to keep up with the rising cost of consumer goods, energy and gasoline.
The housing market has been considered as a viable hedge against inflation, as home prices are up 19.8% according to the S&P CoreLogic Case-Shiller Indices.
Americans bought more homes over the last year, as compared to 2020 as a result of the seemingly low-interest rate. The rising cost of timber, wood, steel and other construction materials has stagnated the purchasing power of those now on the hunt for a new home. And now Americans are set to pay $160 more on their monthly mortgage rate.
Rent is also not getting any cheaper.
Between August and September 2021, rent jumped by 0.5%, the fastest jump in nearly 20 years. While a staggering low supply of rentals has managed to increase rental prices nationally by 10.2%.
As investors look to beat the peak, experts suggest investments into commodities such as timber or steel might tick upwards in the first few months of 2022. As the real estate boom continues, but home prices increase, the rising cost of materials will see commodity prices increase significantly.
But investors might still take part in the ongoing real estate boom. Diversification has become an important aspect for every investor. Real Estate Investment Trusts (REITs) allow investors access to real estate, without having to physically purchase it. REITs are now a popular choice for many, paying dividends, and outgrowing the increasing inflation rate.
So who is to blame?
While economic indicators remain positive, Americans are scrambling to understand how the rise in costs could have occurred? With massive Federal stimulus injection into the economy, and a booming real estate and job market, what caused the increase?
With businesses struggling to fill job openings, and handle consumer needs – imports of certain goods across the U.S. and in other parts of the world couldn’t keep up with consumer demands. The supply and demand chain was completely shattered.
Fuel hikes have also contributed to the growing crisis.
The end price for gasoline is dependent on market influences. In April 2020, only 25% of one U.S. gallon of gasoline was from the cost of crude oil. Yet, the current price for one U.S. gallon has increased by more than 61% in just 12 months.
The Organization of Petroleum Exporting Countries (OPEC) still controls most of the global oil market. While OPEC nations aren’t producing in the quantities many have expected, the United States did little to secure enough gasoline supply for American motorists. Disrupting the supply and growing demand after lockdowns eased in early 2021.
With OPEC nations lacking to supply, American energy corporations had no choice but to hike up electricity prices. An immense increase of 25% in energy prices rocked the inflation rate even more.
But although experts are divided on whether the increase will be temporary or permanent, many consumers and investors are now looking for new ways to hedge the inflation rate.
Treasury Inflation-Protected Securities (TIPS) is one of the principal economic options, as it increases and decreases with inflation measured by the CPI-U. TIPS is now a popular choice, as it offers investors semi-annual fixed interest.
The S&P is already up by 19% for 2021 alone. Finding commercial equities trading with consumer goods and commodities might offer a better return on investment than anticipated. Diversification remains an important factor to consider, and commercial equities might still have the ability to outpace inflation.
Looking for high-quality companies will offer you a long-term viable financial solution. Based on current predictions, U.S. investors are still looking to hedge inflation. But many remain skeptical, feeling Federal impact will still do little to mitigate rising costs. Furthermore, a survey from earlier this year showed that 80% of respondents feel the inflation rate will not fall below 2% until 2026.
The current outlook might tarnish many investors’ economic outlook for 2022. Homebuyers are seeing an increase in their monthly mortgage rate, while gasoline and energy prices have increased three-fold. We’re expecting consumer goods prices to spike, while job openings are struggling to be filled.
A minimal wage growth and a predisposition about the future of American economics have left millions of consumers somewhat hostile. The Federal intervention until now has been slim, while analysts believe a stagnation of inflation will only be expected as early as mid 2022.
The slightest imbalance has again proven the sensitivity of the American economy, as consumers and investors scramble to restructure themselves within a post-pandemic America. Yet, as we see positive economic indicators, a transition period, and stimulus injection has left the economy to keep up with itself.
This post was provided to Slope by Pierre Raymond, a 25-year veteran of the Financial Services industry. Driven by his passion for financial technology he has transitioned from being a quantitative stock picker, to an award-winning hedge fund manager, credit risk manager to currently a RISK IT Business Consultant. Pierre is the cofounder of Global Equity Analytics & Research Services LLC (GEARS) and a current partner at OTOS Inc.
