To anyone who thought inflation was just transitory, the most recently published inflation figures probably came as a punch in the gut. Not only is inflation not transitory, but it continues to rise. The headline figures are 6.2% for year on year inflation, the highest level in over 30 years. But the even more shocking figure is the 0.9% jump from month to month, which is an annualized rate of over 11%.<\/p>\n
That\u2019s a figure that hasn\u2019t been seen in over 40 years, and it\u2019s a concerning indication that we may have only seen the beginning of ever higher inflation. This heightened inflation could very well be with us for months, if not years, and could likely get worse before it gets better.<\/p>\n
Don\u2019t expect inflation to resolve itself this year, and probably not next year either. We\u2019ll probably look back blissfully in a few years at the sub-2% inflation rates we used to see post-2008. The reality is that we\u2019re entering into a brave new world in which inflation rates could not only be higher, but also more unpredictable.<\/p>\n
That\u2019s going to impact you everywhere you go, from the gas station to the grocery store and everywhere in between. And it will especially impact you as an investor. Unless you prepare yourself now and start investing with an eye toward protecting your wealth against devaluation through inflation, you could be putting your ability to accumulate wealth at risk.<\/p>\n
As Milton Friedman once said, inflation is always and everywhere a monetary phenomenon. We like to forget that nowadays, but it\u2019s true. And the entity that\u2019s in charge of monetary policy, the Federal Reserve System, is the cause of the recent inflation.<\/p>\n
When the federal government decided to initiate its program of fiscal stimulus in response to the COVID lockdowns, it was trying to spend trillions of dollars that it didn\u2019t have. That required the issuance of trillions of dollars of new Treasury debt. And markets likely wouldn’t have been able to absorb that much new debt, especially right in the middle of a recession.<\/p>\n
Enter the Fed, which purchased much of that newly issued debt and held it on its balance sheet. The Fed increased the size of its balance sheet in a matter of weeks as much as it had increased it over years following the 2008 crisis. So it was only to be expected that such a massive monetary injection would eventually result in higher prices.<\/p>\n
We\u2019re seeing that happen right now, and the effects are relatively mild thus far. 6% inflation may be the highest in 30+ years, but it is tame compared to what you would expect from a $3 trillion monetary injection. Don\u2019t be surprised to see much higher inflation in the coming months, particularly as the Fed continues its easing. And those increases are going to be reflected in four major sectors.<\/p>\n
Some economists like to strip food prices out of inflation to show what \u201creal\u201d inflation is. Their reasoning is that food prices can be influenced by weather, shipping, and other non-monetary factors that would drive prices up further than could be explained by just monetary inflation.<\/p>\n
The result, of course, is to underestimate actual inflation. Since food spending is one of the top expenditures for about 90% of American families, rising food prices directly impact American households more so than many other price increases. And if you\u2019ve been doing any shopping at all recently, you know that prices of many foods have been increasing significantly.<\/p>\n
Energy prices have also been increasing rapidly this year, with gasoline prices in particular making it painful for many people to fill up their cars. Even with President Biden\u2019s decision to release oil from the US government\u2019s strategic stockpile, it likely won\u2019t make a big difference at the pump.<\/p>\n
Natural gas prices have also shot up recently, with natural gas now more than twice as expensive as it was last fall. That\u2019s going to result in some very large heating bills this winter.<\/p>\n
Prices of housing, both home sales and rentals, have increased as well. The nationwide eviction moratorium burned a lot of landlords, and many have responded by keeping their rentals off the market until things calm down. That pushes down supply, which is helping to boost prices.<\/p>\n
The prices of homes continue to rise as a result of continued easy money, as well as more interest from urbanites looking to move to rural and suburban areas. How long this will last is anyone\u2019s guess, but there\u2019s an increasing belief among many people that real estate prices are beginning to enter into bubble territory.<\/p>\n
Most American households don\u2019t purchase a car every year, so price increases on cars aren\u2019t necessarily going to be a major drain on finances, at least as long as prices come back to normal soon. But no one knows when that\u2019s going to be.<\/p>\n
Prices of used cars are up over 40% from a year ago, and new car prices are rising as a result of production slowdowns caused by chip shortages. If you don\u2019t have to buy a car, these rising prices won\u2019t affect you too much. But if you really need a car, you\u2019re probably going to feel the pain.<\/p>\n
Even worse, the more money you have to spend on a car means the less money you have to spend on other goods and services. And so rising car prices could mean less money flowing into other sectors of the economy.<\/p>\n
It\u2019s not just consumers feeling the effects of inflation. Savers and investors feel them too. And as inflation rises, it will eat into the returns of investors. Suddenly the 4% annual return that some financial gurus suggest for your retirement savings portfolio becomes insufficient, as 6% inflation means that your real return is -2%. In other words, rising inflation could cause the dollars in your portfolio to lose purchasing power each year.<\/p>\n
The goal, then, will be to find investments that offer a real return, one that exceeds the rate of inflation. But investors will face a dual conundrum.<\/p>\n
On the one hand, a highly inflationary environment will likely weigh on stocks, which form the bulk of many investors\u2019 portfolios. And with a slowing economy, stocks could either crash or suffer a long, slow decline. That right there will diminish investors\u2019 ability to achieve real returns.<\/p>\n
On the other hand, traditional safe havens like cash, savings accounts, or bonds are going to lose money due to inflation. And even if interest rates rise and provide higher yields on those assets than currently, they\u2019re still not likely to rise to rates higher than inflation.<\/p>\n
The key for investors then will be to maximize returns in an era in which traditional growth assets are declining in value and traditional safe havens don\u2019t provide much security. You might think that\u2019s not possible, but think again.<\/p>\n
Historical experience shows us that there are assets that can still gain value in a high inflation environment in which stock markets perform poorly. The 1970s is a prime example of that, with stock markets showing hardly any growth at all, while inflation peaked at 11%. But gold and silver averaged annualized gains of 30%, easily outgrowing both stock markets and inflation.<\/p>\n
If the 2020s end up being a repeat of the 1970s, don\u2019t be surprised to see gold and silver repeating some of that performance. With a weak economy and rising inflation, the stage is being set for gold and silver to really shine. And that could make them a good choice for those looking to protect their assets.<\/p>\n
Of course, protecting your savings and investments means being prepared ahead of time. Once stock markets begin to collapse, millions of people will try to liquidate their assets and flee to safety at the same time. If you haven\u2019t prepared before then, it might be too late.<\/p>\n
That\u2019s why now is the right time to start thinking about gold and silver. If you have retirement savings that you want to protect, you have numerous options available to you. A precious metals IRA<\/a> allows you to invest in physical gold and silver coins or bars, giving you the ability to benefit from potential future price growth while still enjoying the same tax advantages of a conventional IRA. And you can fund your precious metals IRA by rolling over or transferring assets from your existing 401(k), 403(b), TSP, IRA, or similar retirement accounts.<\/p>\n