How Inflation Will Change Industries

By: Curtis Wayne 0 Comments   3/15/2019

It is not easy to predict how inflation will change different industries but it is usually clear many years later.  One way to beginning is to look at the asset bubbles, because when new money is added into the economy is always goes somewhere. 

The industries that get the new money first have an advantage of growth and rising asset prices, followed by sales and wages increases.  But the new money also causing these industries to look better than they are, driving more credit and labor to move into the industry than should have. 

A few years later, when the prices get too high and consumer pull back, the industry suffers a major correction.  This is called malinvestment.  

The U.S. economy has not been in recession for ten years, but the trillions of dollars added to the economy has created many asset bubbles.  

Several industries are in bubble territory and consumers are maxed out with debts.  Stay clear of collapsing industries like Retail, Auto, Housing, Construction, Restaurants and Banks.  

Industry changes to consider

  • Retail – The retail industry is suffering from several things right now, online sales gets all the blame, but inflation is also playing a key role is the demise of the retail industry.  Inflation is especially hard on industries that rely on imports for several reasons.  First, inflation causing the value of the currency to drop and the cost of imports to increase. Second, inflation cuts profit margins on products that take a long time to produce because by the time the product is designed to the time it is put together and sold, the material costs have increased and the sale prices have to increase to cover the future increase in material costs also.  Third, increasing interest rates make is more difficult to service massive debts already leveraged on the retail industry for previous years of malinvestments. 
  • Autos – Used autos will flood the market as people can no longer afford monthly payments, which will drive down prices and drastically slow down new auto sales.  Used part dealers and auto repair shops will may see some growth as people drive older autos longer.  New cars prices will continue to climb with the increasing cost of imported parts and the long time is takes to manufacture a new car pushes up prices to protect profits from higher material costs for future parts.
  • Housing – Rising interest rates have already slowed down housing sales, some areas are already seeing major declines.  New housing prices have been pushed up by so many things like higher-property tax, higher-sales taxes and higher-wages that cannot quickly reverse, which will keep new home prices high and out of reach for many in the middle class that are already facing record high consumer debts.  This will likely to lead to the second large housing market correction.  Many industries are part of the housing market.  For example the Furniture/Appliance industry will following the Housing slowdown. 
  • Construction – The slowdown in the housing market will slow home construction to a crawl. Many will move to the many half empty apartments that have been built in the last decade while credit was not easy to get.  Commercial construction will also slowdown because it will be difficult to raise taxes for any new construction projects.  It will be difficult to collect all the tax increases that have already passed to pay for the new schools, churches and government building that have already been built with future tax collections bills.  Banks will be more reluctant to fund projects as interest rates are higher and material costs has got up.
  • RestaurantsHundreds of restaurants have already been closing in just the last few years, because consumers have too much debt and cannot afford to eat out anymore.
  • Banking – Banks are lucky to be the first industry to get their hands on new money added into an economy.  The new money added from the 2008 recession was primarily given to banks, to keep them from insolvency when asset prices collapse.  But now that the economy is growing and the new money has made its way into the economy, it has created many bubbles and when those industries start to pop the banks will lose a lot of money that they have tied to these bubble assets as collateral.  Banks also lose consumer loans once consumers stop buying cars and houses.  At the same time, banks will get access to the next round of new money first so making friends with a many banks will help you or your business get access to credit at a time when credit it difficult to get.
  • iPhone/Social media – As the recession deepens, many consumers will drop coverage and stop buying new phones, move to cheaper plans and cheaper phones.  Social Media companies will collapse with the collapse of online ad bubble as consumers pull back.
  • GovernmentsTrump’s 2020 budget has a 5% cut to government departments.  This is just the beginning of government cuts.  As the recession deepens, the government will be forced to cuts costs, including entitlement programs like Social Security, Medicare and Medicaid.  Inflation is the underlining reason for the recession.  Inflation is the reason for the assets bubbles that will pop.  Inflation will cause expenses to increase (expressed in higher import prices, greater trade deficits) and income to drop (expressed in tax revenue dropping), government programs will be forced to cut programs, teachers, road construction, health care services, college funding, pensions, etc.
  • Higher education – Student debt is $1.5 trillion and climbing.  Many of these loans will default once the recession is realized.  Once the student loans go bust many colleges could be forced to close or merge with other colleges. Students will try to find other options, online schools, 2-year tech schools rather than 4-year colleges.  Private schools will continue until the stock market crashes and the wealthy lose the money they use to pay for their children’s private education.
  • Healthcare – As the recession deepens, people will no longer be able to pay their medical bills.   Many people already have higher deductible insurance plans than they can afford.  Unpaid medical bills' is the number one reason people file for bankruptcy.  At the same time baby boomers will continue to support the medical industry with a higher demand for surgeries and medical devices.  The pharmaceutical industry is also changing, they have begun reducing investments in research of new drugs because of the increasing risk of future government price controls and the increasing risk of failing to pass clinical trials.

These are some of the changes to industries because of the inflation (new money) that has been injected in the economy since the 2008 recession.  Few economist are pointing out that these changes are due to inflation. 

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