Inflation in the United States rose sharply in April and was a major concern for investors. These higher than expected data are putting pressure on the Federal Reserve to hike rates sooner than promised. Inflation rose by 4.2% compared to the previous year. A number that has not been seen since September 2008, when US inflation rose 4.9%. The jump was surprising as analysts were expecting inflation of 3.6%. However, the crisis in the supply of microconductors, particularly due to its impact on the automotive market, made all the difference. What’s really going on? What should investors do?
There has been talk of inflation since last year. But not all warnings were credible. Many speak of inflation since the worst deflationary crisis in the second quarter of last year. To be honest, inflation is already a fact. The economy is recovering significantly. And it’s getting hot. There have been significant price increases for various items. The sectors most affected were: food, energy, real estate, raw materials. Steel, collection, and other goods have seen increases that are affecting the cost of production in many industries.
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The Federal Reserve does not deny the inflation numbers. In fact, the warning has been promulgated in every one of his statements since late last year. We all knew inflation was coming, but as a necessary evil to increase employment. See “Phillips Curve”. Now a war warned does not warn a soldier. However, the markets are concerned for good reason. Here the analysts share. What if inflation gets out of hand? Is it temporary or chronic? Is the Federal Reserve underestimating its powers? The inflation naysayers, of whom there are many, remember the 1970s. During this controversial period, the directors of the reserve also spoke of the alleged “impermanence”. Inflation, but things got out of hand. Will history repeat itself? Well that remains to be seen.
The breakdown is as follows: On the one hand, we have those who believe in Jerome Powell’s promises. On the other hand, we have the skepticsskeptics believe that sooner rather than later, friend Powell will have to swallow his words and raise interest rates before 2024. An increase in interest rates would drain liquidity from the system, which would ultimately result in a dramatic or non-dramatic slowdown in financial markets. In other words, a crash. It would be the end of the bullish boom that has benefited investors so much.
It is also possible that the so-called “crash” does not take place despite this increase. In the past we have had bullish booms despite a tight monetary policy. What is needed is a gold mine at the real economy level. This could potentially happen in a post-pandemic period due to a sharp surge in consumer spending. In other words, pandemic survivors might feel the urge to live the insane life. And that could mean a significant increase in consumption. In other words, rate hikes aren’t necessarily the end of the world.
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Is this inflation really temporary? If we analyze point by point, we can say that Powell might be right. For example, the micro-leadership crisis could be resolved by resolving production and sales errors. The same could happen with energy and raw materials, which are just waking up and the indolence created during the crisis is causing a temporary supply shortage. However, this is a dangerous game. Production and distribution chains will not fully awaken as countries seek refuge in protectionist economies after the pandemic. And these are essentially geopolitical phenomena that are beyond Powell’s control.
When the economy grows due to an increase in production, we can sleep well. In other words, Biden’s infrastructure plan isn’t necessarily bad, but the money must be used for investments. If we only have budget spending, economic overheating will be inevitable. Which of course would be reflected in inflation.
The current unemployment figures could be quite strange if we add them to the reports of labor shortages from different sectors. Don’t people want to work? Exactly. This obvious dilemma could have multiple explanations and various implications. Unemployment could remain high and at the same time there could be a labor shortage if it is more profitable to stay at home than to go to work. In summary, it is very easy for progressives to get out of hand with help and spending.
How can you invest in the face of so much uncertainty? As an investor, buying assets is the most obvious defense against inflation. It is best to go for undervalued assets. Goods in general do quite well in times of inflation. Depressed sectors during the coronavirus crisis: hotels, restaurants, entertainment, tourism, airlines, automobiles. These sectors could be great investments today. The tech sector is harder to read, however.
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The Bitcoin case is pretty complicated. Although it repeats like a broken record that Bitcoin will perform excellently in a high inflation scenario. I’m afraid that remains to be seen. Of course, Bitcoin works very well with a few people on the floor. In the flexible monetary policy scenario, risk tolerance increases and Bitcoin appears like a star. But how is it shared in a low liquidity scenario?
With Bitcoin, it was always best to buy and wait. Move forward to let time work its magic. But I would say that a plan B is never a bad idea. It is also possible to sell a bit of Bitcoin now during the bull season in order to get through the eventual bear season. If Bitcoin continues to rise, that’s fine. But if, due to a setback of fate, it gets too low, we would have a mattress. I would say there would be nothing wrong with getting this calculation. Put greed aside for a moment in the name of wisdom and common sense.