Inflation Is Low… Or Is It?

If you’ve read Federal Reserve press releases over the past decade, one thing that the Fed constantly drones on about is how low inflation is. The Fed wants to target a 2% annual inflation rate and is always complaining that inflation is running lower than that target. The folks at the Fed act as though rising prices are a good thing and that falling prices are a curse to be avoided. But while rising asset prices may be a good thing for the fat cats on Wall Street, those of us on Main Street continue to feel the pinch of ever-higher prices for food, cars, and housing.

The first thing to remember is that official government inflation figures dramatically underestimate the actual rate of price rises felt by most consumers. That’s done intentionally, to make it seem as though the Fed’s incessant money creation isn’t as bad as it really is. But as anyone who goes to the grocery store on a regular basis understands, prices continue to get worse and worse every year. And if you’ve been saving up to buy a house, you’ve probably been frustrated at the housing market of the past decade, which has seen prices rise so high that most people can’t even think about buying a house without selling their firstborn.

Then there’s the fact that inflation statistics don’t factor in the inflated cost of financial assets. Where does the government think that the huge increase in stock prices over the past three years has come from? It isn’t due to sound economic fundamentals, but rather due to the large number of companies taking advantage of low interest rates to issue debt in order to buy back their stock. If that increase in the price of stocks isn’t an indicator of inflation, what is?

Now we have the phenomenon of Fed policymakers wanting to dispense with the 2% target rate and let inflation run rampant if they deem it necessary. What upper limit would they want to see, 4%, 5%, or 6%? Who knows, but the idea of allowing inflation to rise that much is a scary thought.

That’s why investors need to be aware of the continued risk of inflation and protect their assets accordingly. While inflationary monetary policy may have boosted stock prices right now, they’ll only stay elevated as long as stock buybacks continue. Eventually companies won’t be able to issue any more debt to fund those buybacks and markets will crash.

Investors who haven’t hedged against inflation by investing in gold will be those who suffer the worst. Assuming that stocks will continue to rise indefinitely is a mistake that many investors make, but it’s easily avoidable. Investors who moved their assets into gold before the last stock market crash saw their portfolios protected throughout the crash and for years afterward. Don’t let your hard-earned nest egg fall victim to inflation and financial crisis, make the right move today by investing in gold.