Over the past year, inflation has reared a potentially hazardous headwind on American businesses and households, as many have been lulled asleep by decades of annual inflation rates below the Federal Reserve’s two percent annual target.
Although most mainstream economists agree on the underlying causes of inflation’s pesky surge, there is no clear consensus on which specific factors dominate. Warning signs have been around even before the COVID-19 (coronavirus) pandemic and inflationary forces have lurked for decades, awaiting the opportune moment to ambush the US economy.
The objective of this paper is straightforward: we aim to identify sectors, and whenever possible, specific industries that are most vulnerable to sustained inflation. As risk professionals, our central concern is judging the degree to which a line of business is sensitive to a particular stock.
There are essentially three steps involved:
- Step 1: Define/discuss the main causal factors that have contributed to inflation.
- Step 2: Identify the sectors/industries that are most affected by inflation’s direct effects and the key suppliers of these industries.
- Step 3: Identify the sectors/industries that are most affected by inflation’s indirect, or secondary, effects and the key suppliers of these industries.
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