Which Way Will Inflation Move?

There are two things about inflation that are certain. The first is that it’s a huge problem for millions of Americans. The second is that no one knows which way inflation rates are going to move. And that makes today’s release of inflation data perhaps one of the most sought after data releases of the year.

With headline inflation having decreased slightly last month, markets were looking for a further decline in inflation numbers as proof that the Fed’s monetary tightening is working. And an expected decline in inflation would have raised hopes that the Fed might reverse its rate hikes in the near future.

Of course, with the federal funds rate still only at 2.5%, and inflation rates running at over 8%, the Fed has a long way to go to bring inflation down. With a real federal funds rate of nearly -6%, the Fed’s monetary policy can hardly be described as tight yet. But hope springs eternal in Wall Street’s mind, which has benefited immensely from the past 14 years of loose monetary policy.

How the Fed Might React

Markets are looking for the Fed to react to declining inflation numbers by reversing its monetary policy tightening, either cutting interest rates or at least pausing rate hikes. But the Fed doesn’t just look at inflation rates, it also looks at inflation expectations, and right now inflation expectations are all over the place.

Inflation expectations come from surveys performed by the New York Fed. Right now, inflation expectations seem to be declining, except that the disparity between the various poles seems to be wider than ever. In essence, while some people believe that prices are going to start decreasing, more people think that they’re going to start increasing.

When it comes to inflation expectations, there could still be a large amount of recency bias, with many people who have come to expect low inflation over the years still believing that current inflation is just a temporary blip. Or the recent drop in gas prices could be encouraging people that inflation might be subsiding, even though oil and gas prices are still much higher than they were two years ago.

In fact, most people still expect prices overall to rise significantly. That’s especially true for groceries, rent, and medical care. Yet prices for gas are expected to rise hardly at all, and overall expectations are lower this time around than they were during the last survey.

And the results of this week’s inflation release will likely have a major effect on ongoing inflation expectations. Until last month, we saw months of relentless inflation increases that never seemed like they were going to stop. The first month of pullback suddenly brightened the hopes of millions that inflation might be under control. But is it really?

This week’s release still saw a minor decrease in inflation, to 8.3% year on year. But that was higher than the expected 8.0% consensus, dampening hopes that inflation is under control. And numerous other figures saw significant misses, including rising month on month inflation versus an expected drop, an 11.4% increase in the food index, and core CPI’s month on month increase coming in more than double expectations. That could help contribute to higher inflation expectations in the future, and could continue to encourage the Fed to stick to monetary tightening.

Historical Parallels

One of the biggest fears many people have is that we might end up in a stagflationary crisis akin to that of the 1970s. Inflation during that decade was high, and had noticeable ebbs and peaks, but never returned to lower levels that everyone expected.

Even if headline CPI continues to drop again next month, or every month until the end of the year, how would the economy operate with 6-7% inflation by year end? And what if that ended up being the lowest the Fed could push inflation with its monetary tightening?

These are some of the biggest unknowns when it comes to the movement of inflation. While Wall Street would certainly cheer a move to 6% inflation, if that ended up becoming the inflation floor below which the Fed lost the ability to push prices, it’s undeniable that millions of people would still find that an incredibly difficult burden to bear.

And that’s why, even though CPI figures are slightly lower this week, it doesn’t mean that we’re out of the woods yet. The Fed realizes this, which is why Fed Chairman Jay Powell has tried to make it abundantly clear that the Fed intends to keep monetary policy tight until inflation is back to more manageable levels. So even if inflation drops to 6% by the end of the year, it’s not likely that the Fed would cut interest rates or slow down its pace of reducing the size of its balance sheet.

The other parallel we’re seeing is between today and 2008. With prices of numerous investment assets in decline since the beginning of the year, we seem to be in an eerie repetition of the first several months of 2008.

At this point in 2008 markets were panicking and the economy was on the verge of a complete collapse, so we’re obviously not in the exact same position we were in back then. But if 2008 was a slow motion collapse, then today seems to be an even slower motion collapse. And how the Fed reacts could very well impact how both markets and individuals react to the potential for recession.

Maintaining Your Wealth

For many people today, maintaining their wealth has become the name of the game. With so many headwinds facing the economy, the likelihood of a return to economic growth appears dim.

Consumer demand has dropped, production is declining, and retailer inventories are growing. If we’re not in a recession already, we’re likely right on the edge of it, and everyone is waiting for the next shoe to drop.

Many of us remember the 2008 financial crisis, and how devastating it was to our investments. Losses of 50% or more weren’t uncommon, and the next recession could very well be just as bad.

But many people also remember the bright spots during those dark days, namely gold and silver. Despite a rough patch in 2008, gold and silver recovered during the crisis and went on to hit record or near-record highs.

Those people who decided to protect their assets with gold and silver before the crisis hit saw their foresight rewarded. And many who didn’t protect their assets with gold and silver vowed that they would buy gold and silver the next time a crisis threatened.

That time has come now, and demand for gold and silver has boomed. With it has come renewed interest in methods of buying gold and silver such as through a gold IRA.

A gold IRA allows you to hold physical gold and silver coins in an IRA account, with all the same tax advantages as any other IRA account. Gains on these coins are tax-free, and you only pay taxes on your gains when you take a distribution. Even better for those who like physical gold and silver, these distributions can be taken in the form of physical coins or cash.

If you’ve seen the value of your savings already eroded by high inflation, and you’re worried about the double whammy of high inflation and a looming recession that could further impact your savings and investments, now is the time to start thinking about protecting your wealth with gold and silver. Call the experts at Goldco today to learn more about the benefits of a gold IRA.