Inflation is beginning to climb, and while 2017 showed that inflation expectations were relatively subdued, it is now clear that both prices and wages are climbing which could erode the value of fixed income investments, cap stock prices and buoy the price of commodities especially precious metals. Now is the time to take advantage of relatively low levels of inflation and purchase gold bullion and silver bars, before the market environment changes.
What is Inflation
Inflation describes the increase in the prices of everyday goods and services. When prices rise, the amount of money that is available for discretionary items begins to fall. For example, if you are paying more in rent, there is less you can spend on purchasing your holiday gifts. Inflation usually first shows its ugly head when prices of energy or food begin to increase. While increases in gasoline and heating oil can take a bite out of your paycheck, these types of changes are usually considered transitory. What is more concerning to central bankers are increases in wages and housing prices.
Wage Gains
While housing prices have near historical highs in some parts of the United States, wages have been subdued over the past 10-years. Economic growth has been steadily growing, but corporations had little incentive to increase wages up until 2018. In late 2017, Congress passed the tax cut and jobs act, which lowered corporate tax rates from 35% to 21%. This enormous 14% decrease in corporate profits will allow companies to retain 41% more of the earnings that they previously paid to the government which will allow them to increase employee earnings.
This phenomenon has already started to occur. Wal-Mart announced bonuses to employees as well as increases in wages. Competition for employees will begin to increase substantially, with the unemployment rate testing the 4% level on a national basis. The shortage of workers is becoming more evident, and this could have far reaching implication for the U.S. economy. There is already a shortage of Labor in Germany and Japan, who are actively courting employees from the U.S. with higher wage packages. A shortage of labor will give employees more power which eventually will eat into corporate profits.
When people have more money in their pocket they are willing to spend more on consumer goods, especially their homes. Housing supply is very tight, and while developers are planning to be more active in 2018, inventories are a multi-decade lows. These could lead to further increases in housing prices, just as wages are beginning to accelerate higher. The combination of higher wages and higher housing prices, are the key aspects that attract attention from central bankers.
What will be the Market Effect of Higher Inflation?
Higher inflation generally leads to higher interest rates as central bankers attempt to reduce the negative effects of rising inflation. Remember if you are on a fixed budget and inflation increases, the amount you spend on goods and services is reduced. Higher interest rates, make the discounted value of future cashflows lower, which can eat into the value of stock prices. Will higher inflation be beneficial to precious metals, such as gold coins and silver bullion? The answer depends on where the inflation occurs, and which central bank needs to act the fastest.
As you can see from the chart of the dollar index and gold, the two generally move in opposite directions. The dollar index has broken down because investors believe yields in Europe and Asia will climb at a faster rate relative to U.S. yields as inflation increases. While inflation could become in issue in the U.S., it is already an issue in Germany. To defend against the erosion of higher yields, traders generally purchase silver coins and gold bars, which are not affected by lower discounted cash flows like stocks and bonds. If you are interested in learning more about how to buy gold coins and silver bars, call Treasure Coast Bullion Group at 800-982-6105 or click here to request your free investment kit. Time is of the essence!
Good Investing,
Treasure Coast Bullion Group
Read more by Treasure Coast Bullion Group, Inc - Staff Writer
