THE
INFLATION
REPORT
QUICK TIPS & STRATEGIES FOR
PROFITABLE TRADING
WRITTEN BY
MICAH LAMAR
#1 RANKED SWING TRADE STRATEGY
ON THE INSIDE
WHAT IS INFLATION
WHAT CAUSES INFLATION
HOW THE MARKET REACTS TO INFLATION
WAYS TO COMBAT INFLATION
EXAMPLES OF HYPERINFLATION
THE BEST WAY TO TRADE INFLATION
WHAT IS INFLATION?
This means if inflation is at 10% (rounding up from its current value),
your $100,000 you had last year in cash now has the buying power of
$90,000. That’s a big hit.
Inflation is a tax on cash, because it lowers the buying power of
cash. Also, high inflation can increase uncertainty about future
interest rates, which then increases stock market volatility –
because many companies borrow money for operating capital and
capital. When interest rates go up, the cost of borrowing goes up,
reduces the profitability of these companies. This puts extra
pressure on small- and mid-cap companies, which can often operate
on thin margins to begin with.
When the cost of capital is unknown in the future (fluctuating
interest rates), it also makes it difficult for companies to allocate
their resources efficiently. When interest rates are pegged, it makes
it easier for companies to allocate their resources.
HOW IS IT MEASURED?
Inflation is measured in a monthly CPI (Consumer Price Index) report.
This is published by the BLS (Bureau of Labor Statistics) during the
third week of the month.
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INFLATION REPORT
Defn: A general increase in prices and
fall in the purchasing power of money.
THE CPI NATIONAL REPORT IS MADE UP LARGELY
OF FOUR SURVEYS.
TPOPS (Telephone Point of Purchase Survey. Roughly 30,000 households
are interviewed each year and asked to identify the “points” at which they
purchase consumer items. This gives BLS a list of grocery stores,
department stores, doctor’s offices, theaters, internet sites, shopping malls,
etc., currently patronized by urban consumers.
CE (Consumer Expenditure). Roughly 7,000 US families are surveyed
quarterly on their spending habits and another 7,000 families complete
expense diaries in the Diary Survey each year. The data collected from these
surveys are used to calculate the relative importance of items in the
market basket.
Housing Survey. Roughly 50,000 rental units are priced every 6 months.
Rent and the estimated rental value of owned homes make up a large part
(more than 30 percent) of the total CPI market basket.
Commodities and Services Pricing Survey. This monthly survey pulls the
price of roughly 80,000 goods and services in retail establishments
(identified by TPOPS).
*CPI Reports with smaller surveys are also pulled on a regional and
metropolitan-are level.
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WHAT ARE THE DIFFERENT TYPES OF INFLATION?
Demand Pull Inflation
Cost-Push Inflation
Built In Inflation
INFLATION RATE JULY 2022 TO AUGUST 2022
Month-to-Month
USA Inflation Rate
July 2022
8.525%
Previous USA Inflation Rate
July 2022 to August 2022
-0.035%
INFLATION RATES FOR USA, 2018–PRESENT
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HAS INFLATION PEAKED?
Many are hoping inflation peaked earlier this year in June when it
spiked to 9.06%. Notice on the chart above that we’ve moved down
for two consecutive months following the June numbers. Also, the
Fed has taken aggressive actions to increase the interest rate to try
and curb inflation. So far, it appears to be working. However, time will
be the true test.
WHAT CAUSES INFLATION?
1. PRINTING OF MONEY
The federal reserve (a private bank not associated with the federal
government) has an exclusive contract with the US government that
allows it to create, from nothing, US Dollars. It then gets to loan the
money to the US government at an interest rate. The US Dollar is an
elastic currency which means that there are no limits to how much
money can be created.
When the federal reserve increases the supply of money into the
economy, the value of each dollar decreases. An increase in money
supply is generally initiated when we have an unbalanced government
budget (a government spends more than it receives), or an economic
stimulus requirement like we saw during the pandemic. The more
money the federal reserve prints, the more money it makes on
interest... so there’s actually a conflict of interest when it comes to
printing more money.
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HERE IS A CURRENT 20 YEAR CHART OF THE MONEY SUPPLY FROM
2002 TO 2022 HIGHLIGHTING A 280% INCREASE IN MONEY SUPPLY
2. SUPPLY CHAIN CONSTRAINTS
When supply chains get impacted and slow down, the overall supply
of needed goods can also slow or decrease. This decrease in supply
can, in turn, increase the cost of said items. This can happen when
ships and freight liners get held up from factory strikes, or when they
shut down or temporarily close (like what we saw during covid).
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3. CORPORATE DRIVE FOR MORE PROFITS
A corporation's main and sole function is to deliver greater and
greater profits for its shareholders. At times, this means increasing
prices as quickly as a market will support. This is easier when one
company holds a monopoly on a product or service.
Sometimes this happens due to supply chain constraints, and
sometimes this happens when a company is testing its product/
service price elasticity ( how high can you go in price before demand
starts to slow).
4. INCREASE IN HOME PRICES
One of the factors that make up the CPI report (30%) is the value of
homes owned. A home increasing in value can be due to several
factors, including location attraction, repairs/improvements, and
general supply and demand, among other factors.
HERE IS A CURRENT
20-YEAR CHART OF
THE MONEY SUPPLY
FROM 2002 TO 2022,
HIGHLIGHTING A
280% INCREASE IN
MONEY SUPPLY
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WAYS TO COMBAT INFLATION
The main means of decreasing inflation is to increase interest rates.
When interest rates go up, the cost of borrowing money increases.
This is often paired with a reduction in the money supply and is
designed to slow down borrowing and economic growth.
This directly affects the price of homes because, generally, people
can afford larger, more expensive homes when interest rates are low,
because their monthly mortgage payments are lower. A relatively
small increase in interest rates from 3% to 5% can drastically
increase the monthly mortgage payment of a house. Generally, when
people can borrow more, they do, and when the cost to borrow
(monthly mortgage) goes up, they can’t afford as much of a home,
which then drives home prices down (supply and demand). Home
prices make up roughly 30% of the CPI numbers, so rising interest
rates have a quick.
Price Controls or Price Caps
This is when a government controls the price of a good or service.
A recent example of this is when Belarus President, Alexander
Lukashenko banned price increases in an attempt to curb inflation.
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RISK OF HYPERINFLATION
Hyperinflation is a term used to describe an economy where the price
of goods and services is going up so fast that they become out of
control. This is often a consequence of unsustainable money
printing. Hyperinflation tends to happen during periods of economic
depression.
While the US is nowhere near hyperinflation, the current rate being
above 8%, is starting to get uncomfortably high.
With the benchmark goal of 2% annual inflation, the current 8%+ is
substantially higher than what's needed for sustainable economic
growth.
THE BEST WAYS TO TRADE INFLATION
It’s commonly known that Energy Stocks do well during times of high
inflation. This go-round has been no different. While the broad market
SPY has gone down since the first week of 2022, Energy has been
very bullish.
At WallStreet.io, we’ve found two successful approaches to trading
the markets this year.
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The first approach is a shorter-term trade (generally 1-3 days) in
stocks when one of our contrarian signals fires. This strategy has
been popular amongst our day traders and short-term swing traders
who follow our resident trader, Slawek J.
The second approach takes advantage of larger swing cycles that
often last 6-8 days. These are called PayDay Cycles and are often
paired with the MACD indicator on a daily chart.
I often trade this strategy, and with the market about to make a
crucial move here in the next week, I believe we’re about to see a
larger 1-3 month move that’s going to either sink the ship or rally
the bulls (depending on the CPI numbers coming out this week).
– MICAH LAMAR, CEO OF WALLSTREET.IO
THE
END
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