Rising Prices, Shrinking Savings: Understanding the Impact of Inflation
Businesses have been padding their profits, according to economists at the European Central Bank.
Inflation rates have been high for the past two years despite interest rate rises, and some economists suggest that businesses are using this rare opportunity to pad their profit margins, according to an article in the Wall Street Journal. Supply chain disruptions caused by the Covid-19 pandemic and energy, food, and raw material bottlenecks have contributed to rising costs, but it appears that some companies have been raising prices faster than their costs have increased. The European Union’s statistics agency has reported that consumer prices in the Eurozone were 7.0% higher in April than a year earlier, more than three times the European Central Bank’s target, and inflation rates also remain uncomfortably high in the US and many other parts of the world.
The desire to boost margins, rather than simply cover increased costs, appears to be one reason why food prices have continued to rise rapidly in Europe. While much of the surge in food prices since the middle of last year stems from higher costs, particularly for energy, since most food production is quite energy-intensive, economists at insurance company Allianz have calculated that about 10% of the rise reflects the search for higher profits. They suggest that this is possible because key parts of the food supply chain are dominated by a small number of firms.
While consumer spending has held up relatively well despite inflation, experts say that we are approaching an inflection point. Higher prices are likely to hit retirees particularly hard, as inflation devalues all currencies and greatly impacts future purchasing power. In this environment, precious metals, particularly gold and silver, can be a good hedge against inflation. Investors may want to consider increasing their allocation to precious metals as a way to protect their savings and investments from the devaluing effects of inflation.
