Rising Inflation Putting More Pressure on the Fed

For the second month in a row, inflation came in hotter than forecast, with the year on year inflation rate rising to 3.2%, higher than the 3.1% that had been forecast. Along with that came monthly inflation that once again reached 0.4% month on month.

Core inflation, that is, inflation minus food and energy, was up 3.8% year on year, with an 0.4% month on month increase. Those 0.4% month on month increases equate to a nearly 5% annualized inflation rate.

Once again, stubborn inflation is proving difficult for the Federal Reserve to overcome. And thus the prospects for a Fed rate cut in June seem to be growing dimmer.

After all, the Fed has pledged not to start cutting rates until inflation gets down sustainably towards its 2% target. And with inflation now starting to show signs of stickiness at 3-4%, the Fed is going to face a conundrum.

Does the Fed abandon its strict adherence to its 2% target and risk being seen as feckless and unable to rein in inflation? Or does it stick to its guns and continue to hold off on rate cuts until inflation is under control?

Pressure on the Fed

Perhaps just as important to the thinking of policymakers as actual inflation are inflation expectations, that is, what people think inflation is going to do. If people think inflation is going to increase, then they may try to compensate for that by buying more in the present. That could lead to an inflationary spiral, in which more people buying in the present helps to drive up prices.

On the other hand, if people think that inflation is going to decrease in the future, they may not feel the pressure to bring forward their future consumption. They may wait a little longer to make purchases, which can help ease upward pressure on prices.

While short-term inflation expectations are stuck at 3%, long-term inflation expectations have risen significantly, from 2.5% to 2.9% at the 5-year mark. This indicates that more people think inflation will end up being higher for longer.

Or to put it another way, it’s an indication that Americans don’t trust the Fed to actually get inflation down to 2%, either in the near term or for the foreseeable future. With expectations for inflation to remain at around 3% for the next five years, Americans are saying that they don’t trust the Fed to be able to make any additional progress against inflation.

The Fed has pledged that it won’t cut rates until it sees inflation making sustained progress towards its 2% goal. But will it actually be able to keep to that pledge?

Inflation doesn’t seem to want to budge below 3%. And if you look at the data, it’s not hard to see why.

Although the Fed has made continued progress at decreasing the size of its balance sheet over the past several months, that hasn’t been reflected in the form of lower inflation.

In fact, if you look at the M2 money supply, it has basically flatlined. M2 reached its lowest point in April 2023 and is actually slightly higher today than it was back then.

That means that whatever the Fed is doing with regard to its balance sheet isn’t having an impact on the money supply, and consequently isn’t having an effect on bringing down inflation.

You would think that policymakers at the Fed would be getting wise to this, and would be seeking to do something different to make sure that what they’re doing is actually decreasing inflation. But remember that this is the same Fed that first told us there wouldn’t be any inflation, then said inflation was only transitory, and then finally agreed that inflation was problematic but assured us that they had things under control.

Americans don’t really believe the Fed anymore, as evidenced by the huge jump in inflation expectations. And that, combined with the fact that inflation is being remarkably stubborn, could likely keep the Fed from cutting rates as early as it would like.

What the Future Brings

Regardless of when the Fed decides to cut rates, it seems clear that further rate hikes are off the table, even if they may be warranted. But it also seems clear that inflation is going to remain problematic.

At 3%, inflation is tolerable, but if it ends up rising to 4-5% because the Fed can’t get its act in gear, then things could get uncomfortable for American households. Inflation has already taken a pretty significant bite out of Americans’ financial well-being, and inflation rising even further isn’t going to be tolerable for many people.

These difficulties coming during an election year will put additional pressure on the Fed, as the Fed will have to balance the pressure coming from the White House to ease policy and ensure a strong economy with the desire to keep inflation under control by maintaining a relatively restrictive monetary policy.

What seems clear is that elevated inflation is here to stay. And if you’re going to have to live with inflation, you’re going to have to find a way to deal with it.

Many Americans have already watched as their hard-earned savings have been eroded by inflation that has climbed out of control. And they’re looking for ways to keep from losing even more money to inflation.

One way they’re doing that is by buying gold, which has a long history as a safe haven asset and a hedge against inflation. With gold hitting all-time highs recently, and possibly poised to keep climbing in price, it offers the possibility of price gains that could keep up or even outpace inflation.

Gold has a reputation for maintaining its purchasing power over time, with the price of gold having increased over 6,000% since 1971, while the US dollar has lost over 87% of its purchasing power since then.

If you’re worried about making sure your savings maintain their value against inflation, maybe it’s time to start thinking about making gold a part of your portfolio. With numerous ways to buy gold, from a gold IRA to a direct cash purchase that can be shipped directly to your door, it can be simple to make gold a part of your inflation protection plan.

Goldco has worked hard to establish itself as one of the best gold companies in the industry, and our $2 billion in precious metals placements and over 5,000 5-star customer reviews are a testament to our dedication to quality gold products and exemplary customer service.

Don’t let your hard-earned money lose any more value to inflation. Call Goldco today to learn more about how you can put gold to work for you in protecting yourself against inflation.