Peter Reagan: Is the 2% Inflation Golden Age Over Forever?

Despite the Fed’s best efforts thus far to raise rates and cool off inflation, I don’t expect relief any time soon.

With that in mind, let’s look into the past to see what  a longer period of inflation looks like.

The best place to start in the U.S. is to take a brief look at an extraordinarily long period of inflation that took place from the 1970s to the early 1980s. We don’t have to examine every detail, which would take hours, but this summary will suffice:

President Nixon abandoned the gold standard on August 15, 1971; this move devalued the dollar and drove up inflation. On the very same day, Nixon announced wage and price controls, which he hoped would tamp down the cost of living and create jobs. The latter move was done as the 1972 presidential election heated up and Nixon hoped to win over voters.

Instead, inflation crept up throughout 1973 and 1974, and by December 1974 it was in excess of 12%. Meanwhile, unemployment rose and exceeded 8% by the end of 1974.

In January 1980, inflation was just under 14%. The next month, inflation exceeded 14%, and it stayed there until July of 1980. Although it dropped by about one percent in July 1980, inflation stayed firmly in double-digit territory throughout 1980 and much of 1981.

It took an extremely dramatic move by then-Chairman Paul Volcker to raise rates high enough (nearly 20%) to get inflation to cool, an action that ultimately triggered a recession. Fortunately, Volcker’s efforts finally tamed inflation, and set the U.S. economy up for massive growth.

You can see the tail end of the historic result of this inflationary period on this chart. Official inflation is reported on the red line, and the blue line represents how it was reported in the early 1980s.

But you can also see approximately when the Fed’s methodology for reporting “official” inflation changed (marked by where the two lines diverge).

Looking at both lines on the graph above in 2023, you might be thinking that the years-long trend of red-hot consumer price inflation (CPI) will begin easing back to normal in short order. It’s a reasonable assumption. There is a trend that’s pointing in the right direction.

And that’s where the next part of this story begins…

High inflation is always stickier than we hope

Unfortunately, there is still a long way to go before any substantial price relief will materialize, particularly for those getting by on fixed incomes:

That first strike, in retrospect, would seem timid: Just a quarter percentage point increase to tackle price surges which in just a few months would peak at their highest annual rate since late 1981. It wouldn’t be long before policymakers knew that initial step wouldn’t be enough.

Subsequent months saw much larger hikes, enough to raise the Fed’s benchmark borrowing rate by 4.5 percentage points to its highest level since 2007. So after a year of inflation fighting, how are things going? In short, OK, but not a whole lot more. [emphasis added]

I’ve said it before and I’ll say it again – the Fed started way too slowly, after wasting months trying to gaslight us into believing inflation would go away by itself.

That didn’t work.

When they finally, grudgingly accepted that they’d have to do something, they took a “baby steps” approach that seemed far more concerned with letting Wall Street down easy than with the price of food and fuel.

In the words of Quincy Krosby, chief global strategist for LPL Financial, “They have a ways to go, it took [the Federal Reserve] a long time to acknowledge that inflation was stickier than they initially assessed.”

When you start late and move slowly, it takes you a whole lot longer to reach your destination.

The problem is, the entire American economy is along for the ride.

Moving slowly is bad enough – but as long as it’s in the right direction, at least it’s progress.

Anti-inflation efforts shift gear – into reverse

Revisions often fly under the radar, underreported in mainstream media – especially when revisions turn good news into bad news.

Case in point: A couple of weeks ago CPI was revised upward for October, November, and December 2022. Powell’s “disinflation” was just a daydream, dispelled by accurate data.

That’s bad enough. But the journey to 2% inflation has taken another wrong turn…

The personal consumption expenditures (PCE) price index has been revised upwards too. PCE can be thought of like a “direct price hike” on goods and services:

…prices that people living in the United States, or those buying on their behalf, pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

What a mess.

Wolf Richter summarized just how big an issue this is:

…the PCE price index for January, released today by the Bureau of Economic Analysis, was a horror show on all counts.

Not only did all the relevant measures get a lot worse in January, but the prior three months, October through December, were revised higher – much like the CPI inflation readings a couple of weeks ago – showing substantially greater inflation momentum at the end of the year than originally shown. The whole thing throws a lot of cold water on the “disinflation” hoopla.

Now, what do we do in the face of a stubborn inflationary trend?

An awful lot of people are making ends meet by piling up debt:

Even with a big 1.8% decline in retail sales in December, revolving credit, primarily reflecting credit card debt, grew by another $7.2 billion that month, a 7.3% increase.

To put the numbers into perspective, the annual increase in 2019, prior to the pandemic, was 3.6%. It’s pretty clear that Americans are still heavily relying on credit cards to make ends meet.

Clearly, this isn’t a sign of a healthy economy. Americans are spending more on everything thanks to rampant price inflation that doesn’t appear to be waning, and they’re relying on credit cards to do it.

When prices go up faster than income, you either cut your costs or borrow money. Recently, Americans have mostly chosen the “borrow money” route – perhaps they actually believed all the “transitory” hand-waving? Maybe they’re hoping that prices will come down soon?

Never forget: hope is not a plan. Any time your financial future is resting on nothing but hope, you’re very likely to find yourself in trouble rather soon.

Before long, people will hit the limits on their credit cards. Then, they’ll be stuck paying both higher prices and credit card bills. That’s a tight spot to be in and, regardless of whether we experience a full-blown national credit crisis, millions of American families will struggle through their very own financial mess.

All thanks to the tax no one voted for, and everybody pays.

So let me ask: should we wait for the Fed to put us back on track, and hope they can get the job done soon? Or should we take matters into our own hands?

Taking control of your own financial future

While you’re saving for the future and planning for retirement, consider a wide variety of inflation-resistant investments to insulate your savings from the corrosive effects of inflation. We don’t know what prices will be like next month, let alone a decade or two down the road – so it’s comforting to know you can plan for future expenses in today’s dollars. Stubborn inflation is just one of many reasons that prudent families consider both physical gold and silver to be vital safe havens in times of high inflation.

We can’t count on the Fed to figure things out. Jerome Powell does not have my best interests in mind. Call me a cynic if you want, but I don’t have a lot of faith or hope in the Federal Reserve. They’ve mishandled the into two and a half epic financial crises since the turn of the century. That’s not exactly an enviable track record…

Is it smart to diversify your savings with assets the Fed can’t inflate away? Should we take control of our financial futures out of the hands of unelected bureaucrats? That’s a decision you must make for yourself. If you do want to reclaim some of your financial sovereignty with physical precious metals, Birch Gold is here to help.
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Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating with the BBB and hundreds of satisfied customer reviews.