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What's the reason for the crazy high inflation globally?

by , 05 May 2022
What's the reason for the crazy high inflation globally?
First world countries are suddenly dealing with higher inflation than in third world countries!

In the US for instance inflation is currently at 8.5%.

It hasn't been above 4% since 2009. And in the past 25 years it's never been above 6%.

And now inflation is the highest it's been in 40 years!

But it's not just the US that's seeing inflation speed up. The UK, Australia, Canada and much of Europe is also seeing the trend.

Here's the weird thing - in the US right now, much of the inflation is happening because of migration…
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How migrants in the US are fuelling inflation
The consumer price Index, which averages prices across America, rose by 8.5% in March 2022 from a year ago, the fastest annual gain in 40 years.

But here’s the thing, coastal cities like San Francisco, New York and Los Angeles are seeing the lowest inflation nationwide…

Inflation rates of as little as 5.4%.

And then places like Phoenix, Florida and Georgia are seeing inflation of 10.9%, 10.6% and 9.9%.

What’s the reason for the crazy high inflation?

Well, people are fleeing areas like New York and LA.

The reason for this? Large cities in the US have become unaffordable, and not particularly great places to live in. So, people are moving to more affordable places, with better living conditions.

But the problem is, so many people are making these moves, that they are chasing property prices through the roof. Services businesses are also not keeping up with demand, and therefore prices are soaring.
Atlanta in Georgia and Tampa in Florida are both two of the highest inflation areas in the US, and both are in the 10 most popular places people are moving to right now.

When people move to an area, it puts additional demands on local goods and services, such as restaurants, and that enables them to raise their prices.

In the end, the financial benefits of moving to the more affordable areas will diminish as prices will tend to revert to the mean.

The same thing is happening in South Africa as more and more people move to the Western Cape, it might be for different reasons than in the US, but the same trend is taking place. Property prices are soaring, and wages are rising faster than inflation.

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A lack of labour could be worsening the problem for the developed world
Countries like the US, Canada, UK and Australia are highly dependent on immigrants for their labour markets. These countries have ageing local populations, so immigrant labour makes up for the lack of workforce.

But during the Covid pandemic borders were closed, and many immigrants were forced to head home.

This for instance led to a shortage of truckers in the US.

The good news is, as the pandemic draws to a conclusion – these countries are opening up their borders to migrant workers again.

And this will certainly calm inflation down as well.

Interest rates are on the up – but will calm down soon

The US have rapidly increased interest rates to also help calm down inflation.

I believe this will have the intended effect towards the latter part of 2022, and inflation will calm down.

And that will put a freeze on further interest rate increases as well.

Obviously, countries like South Africa needs to follow the trend, and we’ll see a further 1% to 2% in interest rate increases to come.

How does inflation affect your investments?
If you have savings in cash – you lose money each day the higher the inflation rate goes. That’s because the cash doesn’t grow in value, but its buying power is decreasing.

Same goes for fixed income investments and bonds.

Stocks are a little more complicated.

Inflation means interest rates increase. And this is a negative for businesses with debt – as interest repayments soar and can rapidly reduce profitability.

That said, higher inflation increases revenue, and if the companies can keep profit margins intact – it means profits will grow at least as much as inflation does, without selling a higher volume of products.

When it comes to property though the situation looks better, as higher inflation allows landlords to also increase property rentals somewhat, as the cost of property ownership will increase for new buyers.

So, in short – when inflation is on the up, invest in businesses with low debt, lots of growth opportunities and growing sales. Look at property, and real assets like gold – and don’t hold cash.

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What's the reason for the crazy high inflation globally?
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