By Philip Moskie
Is inflation sticky? Inflation is the sustained increase in the general price level of goods and services in an economy over a period of time. Inflation is referred to as “sticky” when it persists over time and is resists the measures the fed is taking to reduce it. This is primarily because prices are heavily dependent on the costs of creating those products, such as wages and raw materials, which can be difficult or impossible to reduce once they are increased. Furthermore, there is often a lag effect between changes in costs and changes in consumer prices, which makes inflation slow to rise or fall, even in the face of changes in monetary or fiscal policy.
Table of contents
Introduction
What is Sticky Price Inflation?
What makes certain types of inflation sticky?
Why is energy inflation so Sticky?
What does this mean to my trading?
What should I do?
Key Take Aways
Conclusion
Introduction
Is inflation sticky? As of this writing in early 2023, inflation has been an ongoing problem. The fed has been fighting it for almost a year. Inflation has come down, but many investors are frustrated as these rate hikes have not had the type of effect you would have expected. In this article we focus on looking at the causes of inflation and why certain types of inflation are sticky while others change pretty quickly when changes are made.
What is sticky price inflation?
Inflation is the sustained increase in the general price level of goods and services in an economy over a period. One of the defining characteristics of inflation is that it tends to be “sticky,” meaning that it persists over time and is difficult to change quickly.
This stickiness is primarily due to the fact that prices of goods and services are heavily dependent on the costs of creating those products. Component costs, such as wages and the cost of raw materials, play a significant role in determining the final price of a product. Once these costs are raised, they can be difficult to reduce, leading to an overall increase in prices.
Additionally, there is often a lag effect between changes in costs and changes in prices. As prices are slow to adjust to changes in economic conditions, inflation can be slow to rise or fall, even in the face of changes in monetary or fiscal policy. As a result, inflation is considered to be “sticky” and tends to persist over time.
Let’s look at energy inflation. Specifically, we will talk about gasoline. Oil prices spike then gasoline prices go it. This makes it more expensive to ship goods. This increased cost is eventually passed on to the consumer, but it may take months from the time gas spiked until you see increased costs at the grocery store.
What makes certain types of inflation sticky?
If you look at inflation in the housing market, you will see a place where inflation is not sticky. The amount by which the housing market grows is very dependent on interest rates. As soon as interest rates are raised, less and less people can qualify for mortgages and the housing market gets effected very quickly.
On the other hand, let’s look at employment or wage pressure. As interest rates rise, the fed is trying to reduce demand for goods and services thus bringing down the price. The problem is that with many of those goods and services, labor is a big component of the price.
The percentage of the price of goods created by the labor component can vary depending on the specific goods and services being produced. In general, the labor component is typically one of the largest costs that companies face when producing goods and services.
When it comes to inflation the problem with the cost of labor is that once it goes up, it does not come back down. Currently we are seeing labor pressure from a very tight job market. In addition, because of the current inflation, every worker is demanding a cost-of-living increase. Social security has already increased to meet the inflation rate. Unions are striking and demanding more money. This is heavy wage pressure and when these increases are finalized, they will never come down again. This makes the goods and services that these workers create more expensive forever.
Why is energy inflation so Sticky?
When it comes to inflation, there are some factors that are much more important than others. Energy, specifically gasoline and diesel are extremely important. Why? Because everything in the producing process including the final delivery via truck relies on gasoline. When the price goes up, the cost of almost everything goes up too.
What does this mean to my trading?
As a trader you need to understand sticky inflation because you need to stay in sync with the general market. The general market always stays in sync with the economic conditions of the country and the world. Just when things might be looking great, inflation can rear its ugly head and if you haven’t been paying attention you might find yourself in peril. You cannot be lulled into a false sense of security on the hopes and wishes of the financial media. You must continue to trade like we are in a bear market until the market confirms that is no longer the case. As long as the fed keeps raising interest rates, the general direction of the market will continue to be down.
What should I do?
When you are trading you need to make sure you stay patient and wait for the opportunities to come to you. You need to wait for stocks to hit your buy points and not impatiently act sooner. As far as profit taking, you need to always sell into the strength of the market and your stock. If your goal is 20% on a position but the market just rallied 30% and you are at a 12% gain you need to be taking those profits. Save the heroics for the new bull market.
You should also be sticking to stocks that are well capitalized and in market sectors that are safer in a high inflation environment. Save the thinly traded growth stocks for when the market turns.
Finally, you should be considering ETFs as they can protect you from the dangers that lurk in individual stocks. These dangers can be anything from a poor earnings performance to actual bad news about the company. ETFs are a great way to make trading easier in a time of high inflation and raising interest rates.
Key Take Aways
Inflation is sticky meaning that once it heats up, it is hard to cool back down
This sticky inflation will make the fed keep pressure on interest rates
This interest rate pressure most likely will lead to a recession
The recession will lead to declining corporate earnings
This will lead to reduced equity prices
You must trade with patience
You must take measure to protect yourself like trading ETFs
Conclusion
In this article we have explored inflation and what the term stickiness when it comes to rising prices. We have learned that some inflation is stickier than other. Inflation that comes about from rising wages will never abate once those costs rise. We also discussed why we cannot be lulled into a false sense of security thinking that inflation is gone when it really is sticking around. Finally, we discussed how to protect yourself and give yourself a better chance trading in this environment.