Stubborn Inflation Just Won’t Drop

As 2024 starts, and Wall Street hopes for the Federal Reserve to start cutting rates, the case for rate cuts has grown weaker and weaker. After a relatively strong jobs report, the most recent inflation data shows that inflation is once again jumping upward.

December inflation data showed that inflation rose to 3.4% year on year, from 3% the previous month, while core inflation data moderated slightly, from 4% to 3.9%. That’s hardly the kind of movement towards 2% that the Fed wants to see.

Is Inflation a Problem?

While the difference between 2% inflation and 3.4% inflation may seem minor and unimportant, that’s only if you’re thinking in the immediate future. Over the long term that difference in inflation rates makes a big difference.

An inflation rate of 2% means that over the 85-year lifespan that a typical American retiree might be expected to live, prices will more than quintuple. But a 3.4% inflation rate means that prices will increase 17-fold, rising to more than triple the level of inflation that a 2% rate would bring.

So while Wall Street may not fret about a 3.4% inflation rate, and may see it as evidence that the Fed’s job is nearly done, the Fed knows otherwise. And policymakers in Washington may be sweating bullets right now wondering how they can get inflation to start moving back towards 2%.

Why Inflation Is Rebounding

The high inflation we saw in 2022 was the result of trillions of dollars of monetary stimulus the Fed engaged in in 2020 to support the government’s fiscal stimulus measures. In addition to the Fed’s balance sheet more than doubling, the money supply increased significantly, resulting in the inflation we all have experienced.

When the Fed decided to try to normalize monetary policy and shrink the size of its balance sheet, that had the effect of also shrinking the money supply. That shrinking money supply helped inflation rates fall.

But despite the fact that the Fed has continued shrinking its balance sheet, the M2 money supply is showing remarkable stubbornness. In fact, the money supply reached its nadir in April 2023 and has risen since then.

Since April 2023 the Fed has removed about $1 trillion in assets from its balance sheet. Yet the money supply has remained largely stagnant since then and seems to want to move upwards rather than downwards. Why is that?

That’s the question the Fed is going to have to answer if it wants to make progress against inflation. While the Fed’s efforts to unwind its balance sheet positions is admirable, that’s only one part of the equation.

If the Fed can’t figure out how to keep decreasing the money supply, it may not be able to win the inflation fight. Of course, there’s always the possibility that the Fed got spooked by the money supply decrease, as this is the first large-scale decrease in the money supply since the Great Depression.

The last time the Fed shrank the money supply this much, it exacerbated the severity of the Great Depression and arguably made the depression much worse. That’s something the Fed wants to try to avoid.

If the Fed is doing this intentionally, then the prospects of inflation falling under 3% will remain dim. Maybe the Fed wants to try to make sure that the money supply isn’t dropping too fast because it doesn’t want to intentionally sink the economy.

If that’s the case, then don’t expect inflation to drop below 3%, and don’t be surprised if it rises above 4% either. If the Fed is in a wait and see situation right now, inflation could end up rising a bit before the Fed decides to start taking renewed action.

The long and the short of the present situation is that, unlike the rate cuts that Wall Street is trying to price in, it seems far more likely that the Fed will hold rates steady. And if inflation were to become resurgent, we couldn’t even rule out a return to rate hikes.

How Inflation Could Impact You

Unless you’ve been living under a rock for the past several years, you’ve felt the effect of inflation. From the price of food, to housing, to just about everything you buy at the store or online, prices have risen significantly over the past few years.

If the Fed can’t get inflation under control then inflation could become problematic or, in a worst case scenario, stagflationary. During the 1970s stagflation inflation bounced around quite a bit, from 6% at the beginning of the decade to under 3%, up to over 12%, back down to 5% and then up to over 13% to end the decade.

So just because inflation has fallen recently from over 9% to near 3% doesn’t mean that the Fed has inflation under control. Those who assert otherwise, especially Fed officials, should go back and learn some history before they get too cocky.

The real danger could come if the Fed believes that it has inflation under control, and doesn’t act forcefully enough to actually rein in inflation. If it allows inflation to get out of control again, we could see a return to high inflation that could take a significant bite out of our pocketbooks.

One of the ways to help protect against those negative impacts is by buying precious metals like gold and silver. Gold and silver have served as safe haven assets and inflation hedges for decades.

During the 1970s stagflation, for instance, gold and silver both made average annualized returns of over 30% per year over the course of the decade. If they were to perform similarly, or even at half that rate, in the event that inflation were to return today, most precious metals owners would be very pleased.

Buying and owning gold and silver doesn’t have to be difficult either. Buying physical gold coins or bars to store at home can be done very easily. And if you have retirement savings in tax-advantaged accounts that you want to protect against inflation, there’s always the option of a gold IRA or silver IRA.

With a gold IRA you can fund your new IRA account with a tax-free rollover or transfer from an existing 401(k), 403(b), TSP, IRA, or similar retirement account. Then you use those funds to purchase gold and silver coins or bars, which when held in a gold IRA offer you all the same tax advantages as assets held in any other IRA account.

If you’re worried about the recent blip in inflation and want to start exploring options to safeguard your hard-earned money, maybe it’s time to start thinking about gold and silver. Goldco’s representatives are ready and willing to answer any questions you may have.

With over $2 billion in precious metals placements and thousands of satisfied customers, Goldco works hard to make sure that our customers are happy with their gold and silver purchases. We pride ourselves on stellar products and exemplary customer service.

Don’t let your savings spend another minute losing money to inflation. Call Goldco today to learn more about how gold and silver could help you hedge against the dangerous effects of inflation.