I’m sick of reading headlines about how the recent spike in inflation rates has surprised everyone.
To begin with, it is not surprising to anyone.
It’s not even close to be a surprise. Some journalists just use the word “everyone” because they have the heinous habit of generalizing flaws they observe within their bubbles.
I am not an oracle. I’m just a normal guy who dropped out of the school of economics to pursue an entrepreneurial career. But even I, the most ordinary person, have been talking about this inflation spike for quite some time.
If you are a regular reader of my articles, you are probably aware of this.
- One year ago, in May of 2021, I wrote this little guide about how you can benefit from the incoming inflationary wave.
- Also one year ago, in another article, I listed 4 industries that will benefit from the inflation spike in the next few years.
- A few months later, in July of 2021, I warned that the velocity of money was just too low, and once it accelerated, even slightly, inflation would go BOOM.
- Besides all the bad news, some very specific countries are more resilient than ever to the crises of 2022.
This last article ended with this paragraph (sorry for quoting myself):
Investors cashing their profits will be tempted to use their once-stimulus money for what was the original purpose of it: to buy consumer goods.
When that happens, however, not only the economy will be almost back on track, but the money volume tripled.
What happens when 1.5 trillion dollars is used on a spending spree for new cars, houses, holidays, $4000 Italian shoes, and so on?
The 2022 Inflation Spike Surprised No One With Some Common Sense
Yes, this regular guy who writes for Medium and some random small business blog and uses AI to narrate his Youtube Business Channel because his accent is too strange warned you about the inflation spike.
But not only me. More eminent figures, such as Michael Burry and billionaire Ray Dalio, have also predicted a decline in currency value.
So how dare economists from UBS or other large banks say that inflation surprised them?
I guess the economics graduation course has a subject like “ignoring external signals 101”. I probably would know it if I had never dropped out (gladly I did).
So, here is my next alert:
Things will get worse. Much worse, and I will tell you why.
Check also: Another Negative Economical Record for the US.
What Is Next? Surging Interest Rates or Doves Letting the Inflation Fly?
There are only two scenarios that I see for the second half of 2022, which will also impact 2023 and maybe even further:
The Hawkish Scenario
In this scenario, central banks across the world raise interest rates. Something likely to happen with multiple not-so-drastic hikes (like four or five times a 50bps increase in the US) distributed across various months.
While these interest rate increases, after a time, may reduce inflation, they will have a nefarious collateral effect: a drastic increase in the value of the monthly mortgage payments paid by the average citizen.
Example: Joe and Sue have a mortgage of $450,000 with a loan period of 30 years. Before the Federal Reserve (FED) started to increase the US interest rates, their monthly mortgage payment was $1297.59.
If the FED increases the interest rate to 3% (something with an almost 50% probability of happening) by the end of the year, the mortgage payments of Joe and Sue will rise to $1897.22.
A 46% increase!
To have enough to pay for their mortgage, Joe and Sue will cut on superfluous expenses, like changing cars, dining out, or holiday plans.
This slows down the economy. Considerably.
Unemployment skyrockets. Even with all those efforts, many Joes and Sues will not be able to pay their mortgages, end up losing their homes, and living on camper vans.
If this reminds you of 2008, here is a hint: it can be much worse.
But there is still the second scenario.
The Dovish Scenario
In this scenario, the FED (and other central banks across the world) does not increase the interest rates that much. They have a softer approach towards inflation and refuse to crash the economy.
People will not lose their homes, since the interest rates in this scenario don’t increase so drastically. When they go to the supermarket, however, their money will buy less and less.
People with lower income will keep their roofs but have trouble buying food, medicines, or other essential products.
If this sounds too drastic, here I compared the prices of the same products, in the same supermarkets, between January and March. All researched food items in the US already have an annualized inflation above 40%. Some of them, like eggs, are beyond 100%.
And this is just the beginning. If you want to get prepared before the peak of an inflationary wave, here is a practical guide.
Levi Borba is the founder of expatriateconsultancy.com, creator of the channel The Expat, and best-selling author.