Bearish markets, lower income, increased interest rates, all these are negative effects of inflation that we have been seeing over the past couple months. With inflation at a 40 year high of 7.5%, drastic changes could potentially be seen in the market. The main question many might have however, is what led up to these drastic rates of inflation?
The answer to this question is something a lot of you may have been expecting, the Covid-19 pandemic. Considering that the US Congress approved a $6 trillion bill for the general well being of citizens and the market, most of the 5 trillion from this that wasn’t directly handed to citizens was pumped into the market. If this significant amount of money was not pumped into the market, the stocks of many companies would tank and here is why.
As borrowing prices of raw materials increase, companies that buy these raw materials in bulk would need to pay more for these materials than they did before. Now when a company that directly sells the product, needs to put aside more money for accumulating materials, a vast increase in pricing is expected in order to keep them on track for their earnings.
One very recent example of this vast increase in pricing is the company Rivian. On March 2nd, Rivian announced that they would hike the price of their electric trucks by $20,000. This immediately caused a sell off frenzy for shareholders as the stock tumbled over 25% this past week alone. This massive sell off caused Rivian to quickly revoke this price hike, however the stock is yet to show any bullish indication. It is also important to note that with this price hike being revoked, comes a large possibility of Rivian failing to meet their next quarters earnings estimates. I say this because the reason for this price hike was most likely inflation related as explained before, which is why the revoke of this price hike could result in even further catastrophe for the company. One tactic that Rivian could have used in order to prevent this massive sell off, is adding a price lock in feature to their website similar to the way Tesla does. This price lock feature guarantees that the person who pre-ordered a vehicle would be able to purchase this vehicle for the same price it was on the day they pre-ordered it. Yes, Rivians stock would have still fallen even if they had implemented this feature prior to their price hikes, however the selloff would not have been as dramatic considering that a large factor in this sell off was due to the amount of customers canceling their pre-orders. If Rivian wants to meet their goal of being able to account for 10% of the EV sector as they stated earlier this year, then it is important for them to take some tactics from the most successful electric vehicle company, Tesla.
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