They said the economy is getting better. That’s why inflation is getting worse.
Yes, as the economy gets better, the value of our dollar goes down. That’s how our financial system is designed.
What’s happening is more spending with nothing to spend on. As people start to go out again, go back into working, they have more money on their hands but there is still a shortage of supply.
No lumber. No chips. No grocery. No agricultural products. And when there’s a shortage of supply and a pick up of demand and a lot of money, what happens?
Prices go up and up.
In June and again in July, the consumer price index or CPI rose by 5.3%. For those of you who don’t know, CPI is the measure of the change in prices of goods. When CPI is low, that means the prices of goods and services didn’t go up much.
Despite the Fed suggesting this round of inflation will be transitory, some experts believe that this is the norm. Unless the Fed define transitory to be 50 years… because that’s how long it has been since we started devaluing our own money.
The only question we need an answer to is how worse will it get. There are things we can look into to know this.
First is the producer price index.
The producer price index or PPI measures the change in prices for goods and services at the producer level. When a company has to pay more to produce their products, they will often pass these higher costs onto the consumer. Price changes at the consumer level are reflected in the consumer price index.
As of July 2021, PPI rose 7.7%.
This is, by the way, another proof that CPI could be much higher. If PPI rose 7.7%, businesses would charge consumers more than that to earn revenue.
Supply Chain is another sign of inflation.
Many companies are having difficulty finding the raw materials and labor necessary to manufacture their products. With fewer products being made, inventories are low, especially for a non-recessionary period. This reduction in supply, coupled with increased consumer demand, are major catalysts for the recent spike in inflation.
Lastly, Government Spending.
In the most recent fiscal year ending September 30, 2020, the U.S. had a $3.129 trillion budget shortfall, more than twice the $1.4 trillion deficit during the 2008 financial crisis.
This year, we have the American Rescue Plan Act of 2021, with a hefty $1.9 trillion price tag and ore is on the way.
So, yes. The economy is doing well but only because we are pumping money to our economy. If you put enough money into the hands of consumers, coupled with the stress of the pandemic, they will spend. This has caused an increase in demand, which has served to push inflation higher.
Here is the bigger problem. We have set up our financial system to nurture such a sustained failure.
And there is nothing we can do about it except take care of ourselves. Make your portfolio inflation proof.
How? Invest and make sure it is diversified.
Be sure that you enough assets that if one or two or even half goes down, the rest will carry you through.
And don’t forget gold, silver, and other precious metals. They are your hedge, your last line of defense. It is the best store of value. The $1 you invest in gold now will be as valuable and powerful 50 years from now.
Billionaires and central banks still store it to this day, they trust their economy on it. You should too.
