For over a month or so, I’ve warned that inflation is not under control… And that’s despite the consensus in the financial media…And despite what central banks say or do – aka lowering interest rates. In fact, the recent US inflation data confirmed my suspicions.
October’s numbers showed inflation rose 0.2% month-over-month – bringing the 12-month inflation rate to 2.6%.
While these numbers were in-line with economist’s expectations, they still prove that inflation remains a concern.
And it won’t surprise me if inflation starts to surge in 2025.
Here’s three reasons why…
The bond market’s inflation warning to investors…
As soon as the markets knew the outcome of the 2024 US election, stocks flew higher!
That’s because Donald Trump’s proposed policies such as corporate and individual tax cuts, and relaxed regulation will most likely bolster company’s profits.
This happened during Trump’s first presidential stint. And I expect these policies to boost earnings once again.
But while US stocks jumped in anticipation of Trump’s return, the US bond market told a different story.
Over the past week, the US 10-year treasury yield crept up around 0.2%. Remember, bond prices and bond yields work in the opposite direction. In other words, if bond prices fall, yields will rise. And vice versa.
The thing is…All bonds are sensitive to inflation. Their prices generally fall when inflation rises because it erodes the purchasing power of a bond’s future cash flows.
Long-term bonds are extremely sensitive to inflation. That’s because they’re exposed to its impact for longer.
So, what do today’s rising bond yields mean for inflation?
Simply, the bond market is pricing in the likelihood of higher inflation down the road.
Higher tariffs = higher inflation!
One of Trump’s most popular policies is tariffs. He’s already pitched possible tariffs – ranging from 10% to 200%.
Now, the problem is, increasing tariffs will make imported goods more expensive. Sure, US consumers can switch to American-made goods. But if there’s no foreign competition, US producers can just charge more.
As a result, the price increases will make their way into stores driving inflation higher.
Deporting illegal immigrants could increase the price of services
One of the major reasons behind Trump’s 2024 election victory was because of the previous administration’s inability to curb illegal immigration.
Trump has promised to deport millions of illegal immigrants but the reality is immigrants have been providing cheap labour in the US. So, if Trump deports them, labour costs will rise.
It’s safe to assume US consumers will pay higher prices for those services.
Now remember, rising inflation in developed markets is not good news for emerging markets like SA. As we import many goods, those higher prices will eventually hit our shores – driving up our own inflation.
So, what can you do about it?
First and foremost…Avoid bonds!
As I mentioned earlier, bond prices go down as inflation goes up. So, they’re lousy investments in a period of rising inflation.
Stocks remain your best bet to outperform inflation and grow your wealth.
Lower rates and the potential of tax cuts will juice earnings. And that’s a recipe for higher stock prices.
More specifically, own shares in quality, high-margin businesses. These types of company’s possess pricing-power. In other words, they can pass on higher costs to their customers, keeping their margins intact.
I hold a number of these types of companies in the Real Wealth portfolio.
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