With inflation such a hot topic of discussion, it’s time to jargon bust it! In simple terms, it’s when prices go up, but below we delve deeper into what it can mean for markets.

Inflation is a healthy thing for the world, with a target rate of +2% a year allowing for population & economic growth. This means the average price of a basket of goods costs 2% more than last year. Certain things cost a lot more, some may have fallen in price, but the average cost of living is +2%.

Central banks injected trillions into the economy to save the world from covid lockdowns. Much of this excess cash found its way into stocks, crypto, and property. This is asset price inflation & is not included in calculations. However as freedom was granted for consumers to get back out and spend, businesses have increased prices to cover the increased costs of shipping and energy.

On the demand side, Infl was driven higher by people clambering to spend cash they saved in lockdowns. Secondly, supply shocks were caused by short-term shipping & factory issues due to covid shutdowns. The aftershocks of the pandemic may have been severe, but the majority will not reoccur year after year.

This is where math is your friend. For infl to continue to be a problem, prices have to keep on going up by the same amount year after year. With microchips difficult to source for new cars, prices of used cars have jumped +37% yoy. Energy prices are 29.3% higher due to oil prices soaring. Infl as a whole was +7% yoy.

The Fed is trying to slow the economy due to worries of infl getting out of control. For more on this, check out the lesson on Interest rates!

In the meantime, now is your window of opportunity to demand a +7% wage increase from your boss to “retain your standard of living”. Then invest it wisely!