With wages increasing and a new stimulus package on the way putting more money into the economy, the demands for goods and services will also theoretically increase. Where there is demand, there are price increases aka inflation.
If wages are increasing at the same rate as prices or slower, then inflation is not so bad. However, inflation has a bad reputation for many reasons. First, usually wages rise at a much slower rate than the prices on goods and services. This means that everyone is negatively affected. Second, wages rise much slower for low wage earners than high wage earners. For example, a 3% raise for a $30,000 a year worker is much different than a 3% raise for a $60,000 a year worker. Third, to combat inflation from getting out of control, governments will try to slow down the economy from overheating by raising interest rates. It encourages saving versus spending. Higher interest rates means that lending becomes more expensive. This means that housing prices will become cheaper, yet to buy a new house, you will have pay a higher interest rate. Business will be slower to expand operations because business loans will be more expensive. Now the hope for all this government induced pain is to crimp demand to a more "reasonable" level, so prices will stabilize or go down. That is the theory.
Someone once told me that the best analyzer of the market is not a business analyst who studied business, but a business analyst who studied psychology.
Last week the government did not raise rates, however the fear that they would raise rates caused the bond market and stock market to move significantly last week. In the case of the stock market, a serious drop.
I hope this post sheds a little light about why the stock market tanked last week with all the good news coming out about our economy rebounding from the coronavirus slump. I know, it seems counterintuitive, but as the coronavirus-era has showed us, life is full of curveballs.
Stay safe everyone.
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