Categories: Family Office, Financial NewsPublished On: September 8th, 2021Comments Off on Market Update – 9/03/202120.2 min read
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Last week, we discussed the possibility of long-term inflation and concluded that the probability of it happening is low. Long-term prices are likely stable or rising slowly. However, if the current short-term price increases caused by the epidemic become long-term, it may evolve into stagflation.
Mild inflation is not the worst possible outcome. Inflation is caused by economic growth and increased demand for products and services. Although the purchasing power of money declines, income levels continue an upward trend.
Stagflation is the worst-case scenario. When it happens, the economy stops growing and may even decline. The rise in prices of consumer goods is caused by a decrease in supply rather than an increase in demand. Income levels do not rise (and may even decline), but prices continue to rise.
At present, the probability of stagflation is low, but is higher than the probability of long-term inflation. We believe that the economic recovery effort will gradually slow down, due to the waning effects of the relief plan and uncertainty brought by the various virus variants.
Price increases are caused by global labor shortage, freight disruptions, and lockdowns in many Asian manufacturing-focused countries lacking vaccines. If the impact of the epidemic on production and transportation continues long term, it may evolve into stagflation in the worst case.
If stagflation occurs, typically the performance of financial assets will be adversely affected. Consumer goods and medical care generally perform well; raw materials and industrial stocks are also relatively unaffected industries.
Real estate has traditionally been a good counter against inflation, but it is important to pay attention as to whether the prices have fallen out of reasonable range. Residential housing may not be as good at fighting inflation in the future due to the past year’s rise.
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