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‘INFLATION’S DRIVER’ PART 1 OF THE SERIES

‘INFLATION’S DRIVER’ PART 1 OF THE SERIES

INFLATION WILL COME MORE AND MORE INTO PUBLIC AWARENESS OVER THE NEXT SEVERAL YEARS

There are many indicators of inflation in the world that we watch to forecast oncoming inflation.  Currently, the great majority of these tell us that the inflation we have seen so far…is just getting started.

In our newsletters at Guild Investment Management we have been talking about inflation and its expected arrival for almost two years.  We have pointed out the reasons for inflation, and discussed them in a general way.  I would like to go into each one individually in a short memo that we will send to clients and to the CIGA’s in the next few weeks.  The public media has picked up on the theme of inflation in the last few months, and they have been haranguing the public about higher food and energy prices.  As a result, many people believe that once the rate of the rise in food and energy prices slows, the rate of increase in inflation will recede.

IT IS NOT THE CASE THAT FOOD AND ENERGY ARE THE SOLE OR MOST IMPORTANT DRIVERS OF INFLATION TODAY.  Inflation is a function of many variables and there are about 10 of them that we will discuss in coming memos.

TEN REASONS WHY INFLATION WILL CONTINUE…TODAY WE WILL START WITH THE FIRST:

1. THE LONG GLOBAL ECONOMIC EXPANSION CREATES INFLATIONARY TENDENCIES IN AN ECONOMY

The economic expansion that began in 2003 was still going strong as the end of 2007 approached.  The current banking crisis in the developed world has caused it to slow.  However, the economic growth rate did not slow in the developing world, and the tendencies leading to inflation remain strong globally.

Some governments are still trying to tell their constituents that the U.S. and European economies are growing, but at a much slower rate.  On the other hand, important economists in both regions agree that the U.S. and Europe are at least in a growth recession…if not an outright recession.

In either case a slight recession or slow growth the current economic climate has been strong in the developed world for 5 years and in the developing world [which is more important] it has been going on for closer to 10 years. China,

India, Brazil, Russia the mid eastern oil producers and many other countries continue to grow at a very rapid rate as I write this memo

SUMMARY

APART FROM THE DEVELOPED WORLD, EVERYONE IS STILL GROWING…AND SOME BIG COUNTRIES ARE GROWING VERY FAST. 
PROLONGED AND INCREASING ECONOMIC GROWTH STIMULATES INFLATIONARY EVENTS IN THE ECONOMY.

Perhaps it is shortages of raw material, skilled labor…or, maybe it is the need for speedy delivery to a customer.  Maybe new customers and new markets are all putting pressure on suppliers to achieve rapid execution in getting the deliveries out on time and with good quality…at the expense of price.

IN BOOM TIMES, PRICE INCREASES ARE EASY TO PASS THROUGH.  THIS LEADS TO PROFIT MARGIN EXPANSION.

Of course, price increases lead to inflation.  In this way, a long economic expansion (such as the one that the world is currently experiencing) will lead to higher prices.  When customers’ profit margins are strong, eventually the customers allow their suppliers to raise prices and enjoy higher margins as well. Higher margins come as result of higher prices.

A long economic expansion breeds higher prices, and is the first of 10 influences on inflation.  Stay tuned for more about what drives inflation.


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