13 May 2021 - “Do not keep your money in the bank or you may find what once could have bought you a Ferrari, would now only get you a used mobility scooter with questionable stains on the upholstery.”
Stock indices around the world plummet on the worst inflation fears in decades!
US tech stocks had a third consecutive day of disaster. The NASDAQ 100 index plummeted almost 2.5% today due to increasing inflation fear. US consumer prices, measured by the Consumer Price Index (CPI or CPI index) rose at the fastest rate since 2008, reportedly after a shocking 4.2% rise over the last 12 months, not seasonally adjusted.
Inflation has been a concern ever since the pandemic hit when governments and central banks had to pump money into the economy. Easy monetary policy was a necessary evil as millions lost their jobs from the worst pandemic seen in 100 years.
President Biden has caused further US inflation fears due to his wild $1.9 trillion ‘rescue plan’. That sort of government spending raised many eyebrows among economists and rightly so. When that money works it way through the economy and consumers start spending, prices will rise fast. Which is exactly what happened in April with the US dollar (measure by the dollar index) hitting a new low. A weakening dollar and rising prices are devastating for US consumers and savers. Inflation fears spread worldwide with European indices and the FTSE 100 index declining as well. The Dow Jones and the S&P 500 all fell around 2% but US tech stocks have been hit the hardest.
The NASDAQ 100 index consisting of companies like Apple, Microsoft, Google and Tesla hit an all-time-high in April of over $14,000. Now, in the last three days due to inflation fear it sits around $12,900!
Inflation is one of the most important economic health indicators, too low and the economy is stagnating with consumers not spending, but too high can be disastrous. Central banks set a healthy target of an annual inflation rate of 2%.
The COVID-19 pandemic created an incredibly unique situation, that has set up a perfect storm. The economy obviously shrunk when the pandemic started, but central banks and governments stimulated it by pumping trillions of dollars into the system. The lockdowns meant reduced spending, no holidays, no fancy meals out, no parties and no Friday nights at the bar. This caused pent up psychological demand over the past year. Everyone is desperate to get back to normal and being armed with their stimulus checks creates a recipe for stimulus inflation disaster.
Trillions of dollars are starting to be spent by consumers as the economy reopens, increased demand equals higher prices, higher prices equals inflation.
Inflation fears among some investors have been high for a while as they have pumped money into commodities like gold, silver, and oil as a store of value. Cryptocurrency has also exploded this year with many believing it is the best hedge against inflation with weakening fiat (US Dollar, Euro, British Pound etc.) currencies.
The solution from central banks may be to raise interest rates as that encourages saving instead, but the danger of that is slowing an economy that has only just reopened. Businesses need to borrow money cheaply right now to get back on their feet, higher interest rates would be detrimental to that. It is a worrying time for consumers, savers and investors alike. The best advice is always investing your extra money into a wide variety of assets to protect yourself from inflation. Inflation is coming, guaranteed.
Do not keep all your money in the bank or you may find what once could have bought you a Ferrari would now only get you a used mobility scooter with questionable stains on the upholstery.
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