By Andrey Dashkov, analyst, Casey Research

Andrey Dashkov

The market could be numb to what comes next for inflation.

Households and businesses have gotten used to the initial shock. The U.S. Bureau of Labor Statistics and other government agencies have been reporting multi-decade high inflation for months now.

Nobody is surprised by an 8.5% annual price growth in the U.S. anymore. Or by the recently reported 9.1% annual inflation in the eurozone. In the U.K., prices were up 8.8% compared to their July 2021 levels.

Even so, every consumer has felt the pain, either through higher grocery bills or at the gas pump.

But inflation is not a tsunami that hits once then goes away.

It’s more like a series of waves that hit one after another.

And new waves of inflation could be coming.

In a moment, I’ll tell you about these “second-order” effects of inflation… and how to protect your portfolio from them.

It’s Not All About Energy

High energy prices were at the center of the “first wave” of inflation.

Oil prices soared 30% over a year. Natural gas prices more than doubled.

Gasoline prices followed.

Some prices rise faster than others. Energy costs were quick to react to this year’s economic and geopolitical crises, such as the war in Ukraine.

But other prices need more time to spike.

Building Materials Could Be Next

Right now, high energy prices are hitting the housing industry harder than before.

CRH, the largest producer of building materials in the world, is already seeing ripple effects. The price of oil has somewhat eased over the past couple of months, but it’s driven up other company costs from logistics to wages.

This impacts the companies that buy building materials from CRH, which forces home builders to raise their service costs in response.

Another company that sells building materials said that its rising costs have already made some of its customers slow down construction.

When this effect reflects in the economy, the result could be fewer houses built and higher home prices.

That’s good news for existing homeowners but bad news for people planning to purchase a family home or commercial building.

Inflation Feeding on Itself

This is probably the most dangerous “second-order effect” of inflation.

As higher prices infiltrate every industry, people expect costs to stay high in the future. They get used to 5%+ inflation.

And they change their plans accordingly. They spend less, invest less, and expect their mortgage payments to increase.

Right now, one-year-ahead inflation expectations for the U.S. are at about 6.2%. They are off their multi-year high of 6.8% recorded in June 2022. But households are still worried.

This is why the probability of recession sits at about 50% right now, the highest level since the COVID slowdown.

To put it in perspective, a year ago, this probability was at 10%.

This is the problem. Economists have given up making recession predictions. At this point, it’s a 50/50 coin toss.

What’s more, the Fed insists on hiking interest rates.

Although the Fed can manipulate interest rates, it can’t persuade households and businesses to spend and invest.

This is why more economists are sounding the alarm that the Fed will not manage to contain inflation without causing an economic crash.

What Should You Do?

As inflation ripples through the economy in waves, price spikes will continue showing up for some time.

So, your portfolio needs to be well-diversified to withstand these pressures.

Having gold is always a good idea when the risk of both inflation and recession is high. An ETF such as SPDR Gold Shares (GLD) provides an easy way to diversify into one of our all-time favorite safe-haven assets.

There’s also an ETF that tracks inflation expectations: Inflation Expectations ETF (RINF). So far this year, it’s up 16% as of writing. If households and businesses continue expecting inflation to stay high or even increase, this ETF could be a good diversifier for your portfolio.

Protection is paramount this year. Adding these ETFs to your portfolio is a good first step.

Good investing,

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Andrey Dashkov
Analyst, Casey Research