It was reported today that gas prices across the country are now averaging almost $3 a gallon and the price of oil is predicted to continue rising in 2011. Because oil goes into virtually all products and services in one way or another a rise in oil prices is usually a good indication of general inflation. With food prices also on the rise, consumers are already feeling the pinch. The Fed, however, has actually made its policy to try to increase inflation. Last month’s $600 billion quantitative easing program and the roughly $900 billion deficit-funded tax cuts now in the works will likely do just that.
Meanwhile, The People’s Bank of China announced today that it will increase its bank reserve requirement as it continues to fight inflation. This is the sixth such increase this year. This split in the global economy between the US, Europe and emerging markets, as the current cover story of the Economist magazine argues, will be a major theme for 2011.
In an environment of higher inflation, we believe that stocks are a good place to be. This is because corporate earnings—and therefore stock prices—tend to increase along with prices.