Inflation and the global economy

The turbulent US economy has experienced its share of rough conditions and the threat of inflation during the past five years. While an economic recovery is expected to occur over the next five years, any increase in inflation would inhibit growth and raise prices for almost every industry. The threat of inflation is on the minds of businesses and consumers alike, with the depreciation of the US dollar signifying a fall in buying power for Americans, especially in contrast with emerging global economies. Since the economy is growing at such a slow pace, inflation is not expected to severely affect operators yet. However, as the economy improves, inflationary pressure will rise. In light of these trends, IBISWorld projects that inflation will adversely affect some industries, but others will emerge victorious.

IBISWorld analysis indicates that a number of industries will experience changes as emerging economies take a step forward, stoking inflationary pressures. Emerging economies like China and India are experiencing particularly strong growth, and this trend will continue into the five years to 2016. Furthermore, faster growth will put pressure on US purchasing power by contributing to a depreciating dollar. The changing economic landscape will affect industries in different ways, causing some to obtain growth and others to suffer losses. The most successful businesses will be able to adapt to the new environment.

During the recession, the Oil Drilling and Gas Extraction industry experienced major fluctuations, and its role in the US economy will continue to be significant. Since the United States imports a substantial amount of oil, the global economy and worldwide supply and demand will prove to be major factors; therefore, it is influenced by inflation. Oil production will pick up globally, but it is declining domestically; the country remains dependent on foreign imports for gasoline. Despite escalating fears, the price of gasoline is not expected to skyrocket, at least for the time being. Furthermore, currently increasing prices are supporting industry growth, since demand for gas is on the rise. From 2010 to 2011, IBISWorld expects that industry revenue will increase by 7.9% to $329.9 billion, reflecting strong domestic demand. IBISWorld industry analyst Justin Molavi estimates that prices are rising at short-term rates, but they will not reach $4 at the pump anytime soon because the economy is recovering so slowly.¬†However, consumers’ fears are valid, since gasoline will likely continue increasing in price as demand from emerging economies grows. While increasing prices have helped domestic operators secure revenue, further escalations may cause them to seek out alternatives to gasoline.

Green technologies and electric-powered cars may help consumers combat high gasoline prices, but they do not yet pose a significant threat to the Oil Drilling and Gas Extraction industry. According to Molavi, “The cost of alternative energy is way too high to compete with oil.” Furthermore, electric-powered cars would require substantial investment from the government, which is not probable given the high deficit. On the other hand, if gasoline prices become too high, people will begin to look for alternative methods of transportation at some point. IBISWorld estimates that while the market for electric vehicles is growing slowly, hybrid and electric cars alike will make up a higher share of total automobile sales by 2016.

Metal industries have also experienced highs and lows as overseas economies emerge and inflation threatens operators’ performance. According to IBISWorld industry analyst Brian Bueno, emerging economies like China and Brazil have rebounded much faster than the United States during the recession. “The momentum of their economies at the time and their internal demand fostered better performance,” said Bueno. Because these economies are not as tied to the financial markets as US companies, operators have performed well. Metal in the United States suffered during the recession because many metals are tied to construction. In particular, the price of aluminum went down further than steel because of the metal’s strong ties to construction. In 2009, the price of aluminum dropped a massive 35.3% to $1,669 per metric ton, though manufacturers experienced a partial recovery of 28.2% in 2010. In the future, aluminum manufacturers will benefit from higher prices, with the price expected to rise by 8.2% to $2,315 per metric ton in 2011.

Gold has increasingly thrived as an investment metal, especially because of inflationary concerns. Low interest rates particularly drove demand for gold over the recessionary period. Bueno says, “Lower interest rates spark fear of too much money in the marketplace, a weak dollar and further fear of inflation.” As a result, these fears drive investors toward gold. In fact, IBISWorld senior risk analyst Areeb Pirani says that gold rose during the recession as consumers underwent a “flight to safety,” trusting that the metal would be a secure investment. Inflation would further support growth for gold, since people will increasingly invest in gold if the dollar depreciates. However, the depreciating dollar also drives up the price of gold, causing some cost-conscious people to forego this investment. IBISWorld estimates that the price of gold increased 24.5% to $1,210 per ounce over 2010; the economic recovery will cause growth to taper off marginally, falling by 0.03% in 2011.

An unexpected market to benefit from inflation, the Tourism industry will face mostly positive conditions coming out of the recession. Because emerging economies are performing strongly, demand from international travel will grow. IBISWorld industry analyst Nima Samadi says that inbound travel to the United States will likely rise because the country will be cheaper for tourists to visit. This trend will stimulate revenue for the Tourism industry and other businesses. Therefore, from 2010 to 2011, industry revenue is expected to increase at a rate of 4.1% to total $1.4 billion.

The depreciating dollar hurts outgoing travel since US consumers will be less likely to travel overseas; however, demand will remain strong because of other factors. Samadi explains that the depreciation of the dollar will encourage consumers to travel within the United States, fueling revenue for a number of operators and industries. Since Americans would lose buying power, it encourages people to stay in the United States and hurts outgoing foreign travel. This trend coincides with GDP growth for emerging markets. Furthermore, Samadi projects that an uptick in RVs and camping will occur, though higher fuel prices may offset this growing market.

Agriculture and food
While many US manufacturers will experience declines in light of global economic strength and cheaper labor overseas, agriculture in the United States will be a promising market. The United States can achieve greater efficiency than developing countries because it relies on technology rather than labor. Since it is not a labor-intensive activity, it will likely experience growth; unlike developing countries, the United States has the capital to employ automation technologies that decrease the need for labor. According to IBISWorld industry analyst Nikoleta Panteva, domestic production of soybeans and oilseeds will particularly benefit the industry since…click here to read the FREE full report on Inflation and the global economy.