Expected inflation hits 10-year highs. Who can profit from inflation?

Investing with moomoo joined discussion · May 11, 2021 18:40

Who can profit from the highest expected inflation in nearly a decade？

Expected inflation hits 10-year highs. Who can profit from inflation?

What is inflation?

Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time.

Often expressed as a percentage, inflation thus indicates a decrease in the purchasing power of a nation's currency.

Learn more about inflation with moomoo courses:

Understanding inflation: What's the Pros and Cons of inflation? How to track it?

Central banks of developed economies, such as the Federal Reserve in the U.S., take necessary measures to monitor inflation.

How is the inflation level now?

As the economy reopens, more Americans expect inflation to increase over the next few years.

According to the Federal Reserve Bank of New York’s Survey, the expectation is that the inflation rate would be up to 3.4% one year from now — its highest level since September 2013 — and at 3.1% three years from now.

What caused inflation?

Cost

Soaring commodity prices that have sent the cost of raw materials from copper to iron ore and lumber to record heights are the latest indicator of inflation.

As commodity prices increase, the added costs of production are passed on to consumers in the form of higher prices for the finished goods.

"This environment is a sweet spot for commodities, as inflation is starting to rise, but monetary policy is not getting tighter for quite some time (we expect a Fed liftoff in 2024), leading to a virtuous cycle of higher commodity prices, stronger EM growth and rising global inflation, reinforcing the same positive feedback loop between commodities and the USD that happened in every other structural bull market, like the 1970s or 2000s,"
--Goldman Sachs

Demand

Demand-pull inflation can be caused by strong consumer demand for a product or service. When there's a surge in demand for goods across an economy, prices increase, and the result is demand-pull inflation.

Consumer confidence tends to be high when unemployment is low, and wages are rising—leading to more spending.

Economic expansion has a direct impact on the level of consumer spending in an economy, which can lead to a high demand for products and services.

Why is rising inflation important to investors?

Tech sell-off on Monday

Investors worry that surging inflation could force the U.S. Federal Reserve to raise rates sooner than it currently expects.
$Nasdaq Composite Index (.IXIC.US)$

Higher interest rates tend to weigh most on the valuations of fast-growing companies—such as tech firms—since their worth depends in large part on forecast profits years from now.

The Fed, under Chairman Jerome Powell, has stressed it won’t be swayed by one-off price increases driven by economic reopening.

Some sectors could benefit from inflation

While consumers experience little benefit from inflation, investors can enjoy a boost if they hold assets in markets affected by inflation. For example, those who are invested in energy companies might see a rise in their stock prices if energy prices are rising.
$Energy Select Sector SPDR Fund (XLE.US)$

Some companies reap the rewards of inflation if they can charge more for their products as a result of a surge in demand for their goods. If the economy is performing well and housing demand is high, home-building companies can charge higher prices for selling homes.

In other words, inflation can provide businesses with pricing power and increase their profit margins. If profit margins are rising, it means the prices that companies charge for their products are increasing at a faster rate than increases in production costs.

What's to watch for next?

- A host of Federal Reserve speakers this week will be closely watched by markets to assess how authorities are likely to respond to receding risks posed in some major economies.

- A test case on U.S. inflation will come this week when the Labor Department releases its latest consumer price index report on Wednesday.

“Inflation's shadow looms large and we do think that there is a limit to the Fed’s tolerance of inflation,”
--DBS Bank strategists said in a note on Tuesday.

Source: Reuters, CNBC, Bloomberg, Investopedia