In a world full of suspicion and conspiracy theories, inflation has become the new bigfoot. The authorities deny its existence. But sightings are reported all the time. The problem is that these “close encounters” don’t always enjoy credibility because they are anecdotes told by biased people. Of course, we are not talking about inflation in general here. We are specifically talking about inflation in the United States. Which is very relevant to everyone because of the importance of the dollar. Let’s talk a little about the New Bigfoot Why so much entanglement with the concept of inflation?
For the purposes of this article, we’ll limit ourselves to defining inflation as a number formulated by the United States Labor Statistics Bureau: The consumer price index (CPI). A few details are worth mentioning about this indicator. First, it’s pretty selective. Second, it’s a national average. The indicator measures more than 12 categories: food, clothing, accommodation, health, transportation, communication, entertainment, culture, restaurant and hotels, etc. But objects that are too volatile are usually excluded. Interestingly, the energy, food and real estate sectors are not fully included. For example, rents carry more weight than house prices.
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Here is the problem of personal anecdote as an indicator of inflation. Imagine a man named Bob, a resident of New York City, goes to the market looking for a house. You may notice significant increases in house prices. It is safest to look for apartments in “good places”. and apparently everything is through the roof. To add insult to injury, gasoline prices soared. And everything in the supermarket seems to be more expensive than necessary. He arrives at his house and the news says inflation is zero. A lie! Bob, of course, boasts and that’s where the paranoia begins because, in his opinion, he’s seeing inflation everywhere with his own eyes
Obviously, Bob’s problem is his test. Bob is looking for real estate in increasingly exclusive areas. Your supermarket is a chain that sells luxury products. And gasoline surely rose due to a temporary supply problem in the Middle East. Bob’s measurement doesn’t measure his rent that hasn’t increased in 3 years, doesn’t measure his clothes that haven’t increased, and doesn’t measure his services that have actually decreased. Bob’s measurement doesn’t measure the drop in price of many items which, because they’re made in China, are now much cheaper. And property prices outside of New York aren’t taken into account. What is the price of real estate in Louisville, Kentucky?
However, There is one more factor that needs to be considered. Let’s assume for a moment that prices have fallen due to a sharp drop in demand. Let’s say an item that costs $ 100 costs $ 50. Now let’s assume that the price of such an item increases by 50% within a year after a large advertising campaign. We’re talking about 50% inflation, but the price of the item actually only reached $ 75. Suddenly we read the headlines in the press: â ???? The price of apples rose by 50%. Consumers are on the verge of panic. The apple sellers say the apples are actually too cheap and the price should keep rising. Suddenly nobody understands and the audience is overwhelmed with confusion.
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All of this inflation confusion is usually examined by critics of the government. Conservatives and libertarians in particular in the United States always speak of inflation in the United States as if it were Venezuela or Zimbabwe. In the crypto room full of libertarians, the inflation alarms are constant. But these screams are more dogmatic than economic screams. You are constantly on the lookout for inflation. Even in times of deflation there is supposed to be inflation. Many have even used the term “hyperinflation”. to create a dramatic effect of the situation. By the way, hyperinflation is when there is more than 50% monthly inflation.
Now, at this particular point in time, the inflation warnings are legitimate. There are currently significant price increases. For the first time since this crisis began, we are seeing inflation higher than expected. Many in the corporate world have expressed (legitimate) concerns about this. Warren Buffett, for example, is one of them, but he’s not alone. Indeed, the list is long. For example, the consumer price index (CPI) for March rose 0.6%, leaving the annual inflation rate at 2.6%. This is still a conservative rate, but quite high when you look at the annual average over the past few years: 2%.
Inflation isn’t bad for debtors. But it harms creditors, corporate income, and the employees’ pocketbook. Deep down, nobody wants to see inflation spike. However, the Federal Reserve has repeatedly stated that it is ready to tolerate inflation above its traditional targets to encourage job creation. In addition, they warn us against it this “high inflation” current is temporary. Why ephemeral? According to various studies, current inflation is mainly in the energy, food and raw materials sectors. On closer inspection, it appears that the rise in prices for these items is not due to an increase in demand, but rather to a lack of supply. The shortage of steel, copper and other raw materials has more to do with the failure of the production and distribution of these goods than with the monetary policy of the reserve. These shortcomings have yet to be addressed, but it will take time.
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However, What’s the problem with inflation? I mean why is that a problem? Here I think as an investor. Not as an ideological anti-establishment or currency reformist. Only as an investor who cares about his investments. Generally speaking, inflation is not the worst problem for asset owners. Most investors are believed to have a portfolio that consists primarily of assets. However, inflation can adversely affect wealth if it affects the Federal Reserve’s monetary policy. Of course, inflation also affects corporate accounting. But the main thing is the impact on monetary policy.
When inflation gets out of hand, the Federal Reserve has no choice but to drain liquidity from the system to restore stability. In the process, the value of money would increase and the price of assets would suffer. In other words, if the Fed hiked interest rates and started selling bonds, a financial crash would be inevitable. That said, Wall Street and Bitcoin would go down. In the financial world, inflation is a concern because it harms investments. This is a very different point of view than that of the anti-establishment radicals. Many radicals want inflation out of control to demonstrate the failures of the system. But personally, my goal is different. I prefer a longer financial boom so that the price of Bitcoin continues to rise.