Wolfgang Hammes shares his view on the current inflation situation; he provides a historical perspective on inflation rates in the States, and a warning on overconfidence and complacency.
July CPI inflation rate minimally improved to 8.5 %. This marginal improvement was enough to initiate great euphoria among investors, politicians, and business leaders.
Are we seeing a reversal? Let me start with my BIGGEST CONCERN. The US Dollar is a very strong currency. There is something wrong if a country with a strong currency has CPI inflation that high. The US imports a lot of goods. Our strong currency should give us a much lower inflation rate as we import “deflation” due to the strong dollar.
Compare the US inflation rate with another strong currency country: Switzerland. Swiss inflation rate for June 2022 was 3.4 %. Not surprising for a country with a strong currency.
The question is: What happens to US CPI once the dollar weakens/normalizes to other countries’ currencies?
The second point we should be aware of is that inflation does not occur in linear trends. There are ups and downs and it is quite possible that we will see some relief before inflation will go up again. The key is that central bankers AND politicians have to change the economic environment to enable lower inflation rates. I mentioned before that this also requires higher productivity and re-globalization. If these reforms and changes do not happen we will see roller coaster inflation as experienced in the 1970s:
The challenges for CEOs and investors during times of roller coaster inflation, interest rates, and economic growth are enormous. Strategic agility is required AND INFLATION MANAGEMENT COMPETENCE. If you are a member of the C-Suite of a company: Stresstest your strategy for inflation in general and inflation volatility in particular.
In general, there is a danger that we are too complacent and over-confident about inflation and its challenges, threats, and risks. Yes, there are many inflation opportunities as I pointed out and if you study Warren Buffett’s performance during the 1970s you can learn how to capture these opportunities.
Key points include:
- Inflation trends
- Turning inflation risks into opportunities
- Crippling hyperinflation
Read the full article, Inflation: Turning Point or Over Confidence, on Linkedin.