Is Inflation Coming? How is it Going to Affect the Economy & What You Should Do!

Recently, the Federal Reserve kept printing new money into the economy. The government did this to stimulate the economy during the Covid pandemic crisis. However, all this money printing has its side effect. Inflation is here. As with the April report, the May CPI inflation report from the Bureau of Labor Statistics (BLS) highlighted that prices rose across the board by a lot. Overall, prices in May climbed 5% year over year, the biggest such gain in the headline CPI data since August 2008. Even when you strip out volatile food and energy prices—so-called core CPI inflation—prices rose by 3.8% year over year in May.
 
Investors are spooked because rising inflation, which threatens investment and consumer spending, would need to be tamed by a rise in currently rock-bottom interest rates – and that would be anathema to markets and a corporate sector that has grown used to cheap money. Due to all this money printing, the economy is in a bubble that might eventually burst. The S&P 500 Index has risen so much recently due to all this money printing. I believe the market is overvalued, and the upcoming collapse of the U.S. economy might occur. In this article, I'm going to emphasize how impending inflation is coming and how it will affect the economy. Moreover, I will explain what I did to my stock portfolio and what financial advice I recommend.

What Causes Inflation?
Inflation results when demand exceeds supply in an economy. Economists use the "output gap" to capture this phenomenon. When the economy grows faster than its ability to provide goods and services demanded by consumers, prices rise. When the economy grows more slowly than its potential growth rate, prices tend to fall. Factors that affect an economy's growth rate include the supply of labor and the productivity of those workers.
 
Due to the pandemic, a massive widening of the output gap last year, but the economy's rapid rebound has caused the gap to narrow but not yet fully close. With more fiscal stimulus on the way, the gap will likely close later this year and potentially move above the trend in 2022, signaling inflation risk.

 
How is Inflation Going to Impact the Economy?
When prices for energy, food, commodities, and other goods and services rise, the entire economy is affected. Rising prices, known as inflation, impact the cost of living, the cost of doing business, borrowing money, mortgages, corporate and government bond yields, and every other facet of the economy.
 
Inflation can be both beneficial to economic recovery and, in some cases, negative. If inflation becomes too high, the economy can suffer; conversely, if inflation is controlled and at reasonable levels, the economy may prosper. With controlled, lower inflation, employment increases. Consumers have more money to buy goods and services, and the economic benefits and growth. However, the impact of inflation on economic recovery cannot be assessed with complete accuracy.
 
Michael Burry is best known for anticipating the collapse of the U.S. housing market in the mid-2000s and making a billion-dollar bet on that outcome. He cautioned that stimulus checks, the Federal Reserve's continued pumping of liquidity into markets, and the reopening of large parts of the economy were likely to drive prices higher. Burry highlighted America's inflation woes in the 1970s and Weimar Germany's hyperinflation in the 1920s as cautionary tales about the risks of soaring prices. He also flagged Warren Buffett's description of inflation as a "tax on capital," saying it discourages companies from investing by reducing their real returns and acts as an implicit tax on investors by eating into their purchasing power.

 
Inflation and Stock Market Returns.
Higher inflation is usually looked at as a negative for stocks because it increases borrowing costs, increases input costs (materials, labor), and reduces living standards. But probably most importantly, in this market, it reduces expectations of earnings growth, putting downward pressure on stock prices.  

In the 1970s, the stock market is a mess. It has lost nearly 50% over 20 months, and for close to a decade, few people want anything to do with stocks. Economic growth is weak, which results in rising unemployment that eventually reaches double-digits.
 
The easy-money policies of the American central bank—designed to generate full employment by the early 1970s—also resulted in high inflation. The central bank (once under different leadership) would later reverse its policies, raising interest rates to some 20%—a number once considered usurious. For interest-sensitive industries, such as housing and cars, rising interest rates cause a calamity. With interest rates skyrocketing, many people are priced out of new cars and homes.

 
Are We in a Bubble?
I believe the market is in a bubble now. Financial Assets such as the stock market, cryptocurrencies have increased in price value just this recent time. I have seen stocks that have no fundamental value go up in value by more than ten times. People are just using this cheap money that the government supply to speculate on these financial assets. The stock market is "dancing on a knife's edge," and financial assets such as Tesla, GameStop, Bitcoin, and Robinhood as examples of dangerous speculation in markets.
 
This is why I sold all my stock positions from my portfolio and used the money to purchase Alibaba Group (Ticker: BABA). I did this because I believe all the stocks I was holding in my portfolio are overvalued fundamentally. Even though I know that the market is in a bubble, I still invested my money in companies that I think are undervalue fundamentally. Yes, high inflation usually causes the stock market to fall; however, since I am a value investor, I invested in companies due to their fundamentals and business. However, at this time moment, I am also increasing my cash position in my portfolio in case of a stock market fall. I want to stack up against my cash so that I can buy stocks that might be a bargain valuation.

 
What I'm doing to My Stock Portfolio!
I am still holding two stocks in my stock portfolio: Pfizer Inc. (Ticker: PFE) and Alibaba Group (Ticker: BABA). Pfizer Inc. consists 37% of my overall portfolio, and Alibaba Group consists 63% of my overall portfolio. My current cash balance in my stock portfolio is at $9,480.33, and planning to keep increasing it using the $2,000 monthly contribution to my brokerage account. If the stock market falls, I might use the money to purchase priced companies at a bargain price.
 
It's tough for me to find any bargain in the stock market at the moment. The majority of the stocks are trading at a very high valuation. By piling up cash in my brokerage account, I can later have an opportunity to find a bargain if the stock market falls.

 
What is the Legendary Investor Warren Buffett is doing?
Even Warren Buffett is very cautious about the market and piling up cash at this moment. Berkshire Hathaway is currently sitting on $146 billion in its balance sheet. This cash hoard has been generated through several sources, including organic profits and buyouts. But the most significant contributor has been asset sales, something investors don't usually do unless they're worried about valuation levels.

Having such an ample supply of cash protects the Warren Buffett stock during tough times. It also means Berkshire Hathaway can deploy capital when desirable businesses become available for purchase. The more aggressive buying of Berkshire's shares of late contrasts with Buffett's deals during and after the Great Recession. This indicates he believes that the latest economic downturn and recovery, so far, offer none of the bargains he has historically pounced on.

 
In Summary
I hope this article explains in detail about the upcoming inflation is going to affect the economy. I believe the stock market is in a giant bubble that might eventually burst. Due to this current situation, I am not purchasing any new stocks and piling up cash in my brokerage account. The stock market is currently trading at a high valuation, and it's difficult for me to find any good bargain in the market. Moreover, I hope that by me piling up the cash position in my portfolio, I can have an opportunity to purchase great companies at a bargain if the market falls. Let's see what will happen shortly, and I will keep readers updated with my stock investing strategy!