Inflation: the “single biggest risk out there right now”

Inflation, one of the biggest risks to the economy, isn’t going away anytime soon. September’s inflation data came out slightly higher than expected — with US consumers up 5.4% in the past year — slightly higher than 5.3% in August.

What’s the big deal? Goldman execs see inflation as the top risk to global economy and markets — with high inflation leading to many problems:

• Lower business earnings, consumer spending and stock prices.
• Lower purchasing power — At a 5.4% inflation and a near-zero bank interest rate, your dollars are worth ~5.4% less each year.

The root of the inflation problem — COVID — which has led to:

• Product shortages from supply chain issues.
• Labor shortage from increased stimulus checks and preference for remote work.

But the biggest problem resulting from high inflation: tapering.

The impact: Higher business costs (i.e. wages, material costs) — which are passed down to consumers. In the next three months, 46% of small businesses plan to raise prices.

Prices have steadily risen in the food, energy and new vehicle categories — with energy prices increasing the most in the past year (24.8% increase).

The million $ question: Is higher inflation temporary or is it here to stay? Fed officials remain adamant inflation is only temporary while company execs see it lasting longer.

• Goldman warned that a potential cold winter could create energy supply shortages and make the problem worse.
• Wells Fargo CEO sees inflation remaining “for a period of time” from hiring challenges and wage increases.

The International Monetary Fund expects inflation to fall back to pre-pandemic levels by 2022 — and if they’re wrong, investors and savers could be paying the price.