A great deal of money printing by the Fed has meant that there is a lot of free money floating about. This therefore means that when the lockdowns started lifting, there would be a lot of money chasing limited goods.
Fuel prices have been on the rise since the beginning of the year and house prices have been sky rocketing
April CPI numbers which were released 2 weeks ago. They showed that consumer prices had increased by 4.2% in the 12 months from April 2020.
That's a full 2.2% above the Fed target and even higher than some economists were predicting. It was also the highest CPI print since 2009.
PPI numbers were even higher than that and came in at 6.2% which is the highest measure since accounting began.
馃敟 Why Inflation is Bad 馃敟
When inflation is running above expectations then it can lead to further inflation as people increase their prices to match up with their expectations.
Persistent and high inflation is also detrimental to savers as it means that the dollars that they hold in their bank account is worth less today than it was a year ago.
This is not only bad for people who have to buy goods and services but also for those institutions that have to preserve the value of the cash on their balance sheets.
There are also severe impacts for the US dollar. As the world's reserve currency, if there is a fall in the value of it, it could lead to other countries selling their reserves which could drive down the US dollar index and add to that inflation.
馃敟 Undercounting? 馃敟
Given the way that CPI is calculated, we are undercounting how much inflation there really is. This is because the BLS adjusts the composition of the basket of goods and services.
Moreover, in the wake of the pandemic, spending patterns have changed. This means that people are spending more on certain goods than others. This is where most of the inflation has been taking place.
It has also been hard to properly gather data on how prices have changed. This has impacted on the measurements.
馃 How To Hedge 馃
The best hedges against inflation are those that have a limited supply. Those those that cannot easily be devalued by increasing the amount of supply in circulation.
Often gold is said as a great hedge but it has not performed too well. That is why Bitcoin is seen as the most effective hedge. Limited to 21 million with a decreasing inflation rate.
There are a number of people who have now started to allocate to Bitcoin on this Basis. It includes not only people but large institutional investors and corporates that are trying to protect their balance sheets.
馃 Why it Fell? 馃
When the inflation numbers came out, Bitcoin followed the equity markets and fell. This was not because of the fact that they worried about inflation but because it meant that there could be an increase in rates.
When interest rates start to increase, this means that investors are more likely to re allocate funds away from their "risk on" assets to their more risk off. Bitcoin still falls into the risk on bucket so it fell as well.
