Inflation risk has been an important topic of discussion in mainstream media for the past few years. That’s not surprising given the surge in inflation following the pandemic as consumer spending in 2020 (request) Shot by overdrive from stimulus payment and production (supply) It was shuttered. You need to revisit to understand why it happened “Economics 101”
“In economics, inflation A general increase in prices for goods and services. Changes in inflation are changes in actual demand for goods or services (also known as demand shocks that include changes in fiscal or financial policies or recession), available supply such as energy crisis (also known as supply shocks), or changes in inflation expectations that may self-meet. Note that supply and demand are important aspects of the inflation equation.
According to basic economics, prices are set at a level where the supply of goods or services meets consumer demand. ”
Economic illustrations show all of this basic principle “Econ101” class. As mentioned before, in 2020, inflation was a result of limiting supply and significantly increasing demand.
A massive surge in stimuli sent directly to the home has resulted in unprecedented spikes “savings,“Creating artificial demand. As shown, “Python Pig” The effect is clear. Over the next two years, that “Bulge” Excessive liquidity has returned to previous growth trends. Given that economic growth is slowing down by about 12 months, we need to continue to see economic growth slowing through 2025. “Lug effect” It is important to “Inflation risk” paper.
Understanding that inflation is merely a function of supply and demand, a continuous reversal of financial liquidity continues to erode economic activity. In particular, the inflationary spike from 2020 onwards was not a rise in debt or the Federal Reserve system, but a temporary increase in money supply caused by sending checks to households. Therefore, inflation risk continues to be put under unless the government passes a large percentage of new infrastructure spending bills or sends another stimulus to the home.
“But Reims, tariffs are inflation.”
They are not for two reasons, it all starts with consumer trust.
Consumers are key to inflation risk
I would like to ask you if you tax your product, good, or service. “Fee” Increases inflation risk due to increased product, good or service. It’s completely logical, but it excludes two important factors. 1) Only producers pay “tax” from customs duties; 2) We measure inflation (from a CPI perspective) from the consumer side of the equation.
in “Taxes are not inflation risk.” We discussed the impact of tariffs on the production aspects of equations.
“Surge in demand after the pandemic, supply chain disruptions, and large-scale fiscal and financial interventions supported those rises. As evidenced in the chart below, there is a high correlation between economic growth and corporate profits. Note that outliers in the correlation are historically related to events such as the “financial crisis” and post-economic economic recovery.
Companies must respond to increased business costs (i.e. wages, benefits, products, utility, etc.) and take into consideration the selling price to maintain profitability. Importantly, businesses can pass higher input costs to consumers only if demand remains higher than the available supply of these goods and services. In 2020 and 2021, businesses were willing to spend government money, allowing consumers to take over most of the increase in inflation. However, when excessive savings are eliminated, inflation decreases as consumers reduce their spending. The profits of a company become weaker as its ability to pass high input costs to its customers declines. As shown, as inflation decreases, the rate of change in the company’s profits also weakens. ”
Read that bold sentence again.
When discussing inflation risk, consumer activity promotes the pulse of inflation in the economy. If you subtract inflation from the two-year average of corporate profits, you can visualize the impact. As shown, increased inflation, such as tariffs, is only inflationary in the economy, if it can be passed on to consumers. Inflation surged in 2020 as businesses can take over the majority of their costs to flush with cash. To consumers today. Today, inflation is declining due to declining demand. Therefore, the percentage of increased costs that companies have to absorb is increasing, which reduces profitability for companies, but slowing inflation can manifest itself in the economy.
This is the key point:
“Companies don’t create inflation. They respond to changes in demand and adjust pricing and supply to maintain profitability. When consumers slow down, companies cut prices to reduce supply.”
As expected, consumer behavior is a way of measuring inflation through the Consumer Price Index (CPI), which promotes inflation risk. Consumer trust is key to understanding whether inflation risk exists in the economy.
Consumers lack confidence
Despite all commentary on tariff-related inflation risks, inflation is difficult to achieve if consumers are unwilling or, more importantly, unable to pay a higher price. As This commentary pointed out in the last week’s commentary: “Consumers are tapping out” Consumers show Signs of deep financial stress.
“At the heart of the issue is the collapse of household balance sheets in parentheses for low and middle income. These groups have depleted excess savings accumulated during the pandemic and have been highly borrowed to fill the gaps, referring to widespread cash flow stress.“
Furthermore, consumer confidence in finding employment continues to erode as the economy slows down. Given that employment generates income for consumption, it is difficult to expand consumption if the consumer does not have a job, fearing that they will lose their jobs, and wage growth stagnates (demand).
This can be further investigated. This allows us to examine personal consumption expenditures (PCE), which accounts for almost 70% of the economic equation. Historically, when consumer trust declines, consumption also slows down.
So it’s not surprising that inflation is linked to consumer trust. As consumer trust declines, so does demand for products and services. A decline in economic activity is reflected in current risk of inflation.
Conclusion
Finally, consumer stress is not limited to anecdotal metrics. It appears in the company’s revenues and executive comments. During the company’s revenue call, Walmart CEO DagmacMiron said many customers are under “budget pressure.” They also said,Stressful behavior.” Includes general product overall spending reductions. Specifically, he warned of it “For many customers, money is gone before that month.”
Similarly, Dollar General CEO Todd Vasos was drawing as well. He explained to the customer “I’m struggling more than ever.” Todd added that. Some people are currently looking at items that they don’t recognize., Like medicines and hygiene products, To give food and fuel. he I said, “These customers are making trade-offs we’ve never seen in years.” It was Citigroup CEO Jane Fraser who agreed with that warning. She observed that consumers are “Be more careful” It focuses on spending on less and less costly purchases. This shows growing defensive stances often associated with recession conditions, but they are deflationary too. Ripple effects are inevitable when consumer behavior moves mostly from enthusiastic to survival bases.
In conclusion, inflation risk is very low given the rapidly slowing disruption in the stock and bond markets rapidly slowing down and affecting consumer confidence. Could that change? Yes, but such changes require a recovery in stimulus checks, a surge in government spending, and the Federal Reserve to increase monetary policy. For now, none of them are available.
The most important risk to the economy is not a recovery in inflation risk, but rather a collapse in consumer trust that leads to a recession.
That data may be displayed late.
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