Many young people have no life experience regarding inflation. It's been a very tame price environment for that long. The US Government publishes a CORE INFLATION RATE which excludes Food and Energy. Of course we all experience prices changes in food and energy so another metric is also used called PCE for Personal Consumption Expenditure. The basic in both measures is the expression as a percentage change in prices relative to a previous year or other time frame. Inflation can go up or down and generally a small consistent rise like the current Federal Reserve target of 2% is considered healthy for the economy. The single most observable effect is found in too much inflationary rise in prices and this has a real effect on the lifestyle of consumers. This does not exclude businesses because they often are on the leading edge of inflationary pressures paying more for the raw materials needed in their business. Labor costs also play a role. This gets measured and reports as the Producer Price Index and is worth watching.
So, if wages rise they offset the rise in prices and a lifestyle can be maintained. If wages stagnate or even go down and prices are rising something will have to give in lifestyle choices to stay afloat. Things like food, gasoline, healthcare and others are essential to life so they will be last on the list of acceptable purchases to drop off. Luxury items can baffle some because considering that they almost always have been a rich persons elective they can remain more constant as lifestyle changes are far less stringent on the wealthy. Inflation hits hardest on those with fixed incomes that cannot meet the upward thrust in prices and also the poor and even middle class especially families. If the weekly $300 food budget is now costing $400, well it comes from somewhere. Inflationary times is one of those events where the rich can get richer and the poor get poorer. Older retired people are often on fixed incomes like pensions or Social Security. Inflation will hurt this group.
One common response to inflation is to stock up today at lower prices. This has some effect on savings etc. because the practice uses up cash but it's going down in purchasing power anyway so perhaps better to spend it while it's still worth something. Another practice is to invest some cash in items that will rise in value with inflation like Gold and Silver and other Commodities. This is called a hedge against inflation and even Banks hold Gold. As I type, the cost of lumber is about 300% higher than the same time last year. This eventually shows up in higher housing costs so that's beginning to effect the cost of new homes and renovations. Oil has risen, copper has risen, beef, pork, and other foodstuffs have been rising. We have Inflation! But why?
Inflation is frequently defined as too many dollars chasing too few goods so the price goes up as a market necessity. The Federal Reserves prints new money and this gradually works its way into the economy. When too much money is printed and the supply goes way up and the goods being produced does not go up with it we get inflation. The US no longer is the production powerhouse it once was so the goods being chased by those abundant dollars tend to raise imports. As inflation devalues the US Dollar those imported goods cost more. This can be seen in the record Trade Deficits being recorded month after month. We are largely NOT manufacturing/producing our own goods but using printed cash which has no intrinsic value (this is referred to as Fiat Currency to buy goods produced by other countries). The value of the USD fluctuates but is trending down during inflation simply because it takes more dollars to buy the same item(s) than it did yesterday. When this process of too many dollars chasing too few goods goes wild it is called HYPER INFLATION. Typically this means rising prices at 50% or more per month. So a loaf of bread last month was $4.00 and this month it's $6.00. Month after month of this high rise in prices and pretty soon a loaf bread costs $20 and more. Ouch!
Times can get sketchy even dangerous when people are living under hyperinflation. There are some historical examples that can be read up on if interested and I recommend that you do that. Images of people going to the grocery store with wheel barrows full of cash are not a joke. It happens until the currency involved is printed in enormous face values like one million dollar bills etc. It has happened to other currencies and we are not immune.
If this subject is new to you, read up. This site https://www.thebalance.com/what-is-hyperinflation-definition-causes-and-examples-3306097 is a good research start for understanding inflation and here is a good line up about previous hyperinflation events https://www.investopedia.com/ask/answers/061515/what-are-some-historic-examples-hyperinflation.asp.
The why of this happening is not a one size fits all thing. It can be complex. But just keep in mind the simple idea that the Federal Reserve is fueling inflation by printing money out of thin air while the US economy is not producing the goods but rather importing them in large part then add in the huge deficit spending the governments are engaged in and that's more than enough reasoning. It's a downward and tightening spiral. We are now experiencing inflation. I believe it will get pretty bad and potentially become hyperinflation. The Fed likes to say it will be transitory. OK, but a lot of pain and suffering can happen in a car crash which is also transitory. No matter how they spin it, high or hyperinflation will effect our lives and not in a good way. Plan now. Here are a few recommendations to help respond to current inflation and future increased inflation:
- Eliminate or reduce debt
- Invest in some physical Gold and/or Silver
- Invest in some Gold and/or Silver Stocks and ETFS (I hold Barrick, GDXJ and SIL)
- Look into ways to get out of the US Dollar (foreign mutual funds are denominated in other currencies and you are still allowed to convert USD for foreign currencies though not readily spent in the US)
- Stock up on medical and food supplies at current prices (canned goods have long shelf lifespans but buy items you will eat and not just junk)
- Keep a generous heart, help family and friends as you can but think close to home.
Humanity has been through some rough times and if hyperinflation does arrive, this may try our souls. Be assured that we can survive and come out of it. If you plan as above and read up on other ways to bolster your chances, you can have a good result. Some regard such events as opportunities to speculate and get rich. I do not. The preparation is for survival. Maintain good security for yourself and family and try to travel even on Saturday chores with a companion. Hunger can make even good people do bad things so just be aware that the changing times can become less safe.
I am glad to answer questions and help my clients get through these inflationary times.
Good Luck to You.
Donn Marier
DM-Your Own CFO