From history, we know that once unmoored, inflation tends toward a cycle of unpredictability and destabilizing volatility that can extend for years and even decades.– Doug Noland, Credit Bubble Bulletin
There’s no doubt that everyone is sick of inflation, sick of hearing “the worst inflation in 40 years,” and especially tired of paying high prices for just about everything.
But being inflation-weary is no reason to let down your guard. In fact, that is just what the monetary authorities did in the 1970s. They declared victory over inflation prematurely, which is why the worst inflation in 40 years followed.
Is the Federal Reserve declaring victory too soon, just as it did in the 1970s?
The result then was that inflation roared back to life at even higher rates, as you can see from the following chart.
It shows the consumer price index (CPI) over 15 years, bookending both sides of the inflation decade of the 1970s.
Consumer Price Inflation 1968 – 1983
In a manner eerily similar to our own experience last year, in 1973, price inflation suddenly surged at the steepest rate in many years. By November 1974, the CPI hit 12%. But that wasn’t peak inflation. Not yet.
Along the way, the Fed raised the discount rate, a tightening policy roughly equivalent to the Fed raising the fed funds rate today. Like today, inflation was still intolerably high, but the monetary authorities were cheered by the fact that the inflation rate began showing up lower than what it had been.
Like today, the fundamental problems of spending and debt went uncontained. So inflation got its second wind and raced to 14.4% in 1980.
Along the way, stocks were clobbered, bond prices fell, and unemployment climbed.
Those who turned to gold and silver for safety and wealth preservation were rewarded. Gold rose 2,300%, and silver soared 2,400%.
The Fed and Current Inflation
The Fed’s February rate increase of only 25 basis points may have been too little. “Baby steps,” some have said. It was the smallest increase since the Fed finally acknowledged that inflation wasn’t transitory and began monthly hikes last March. But both the European Central Bank and the Bank of England hiked rates twice as much as the Fed did, raising rates by 50 basis points.
Is the Fed once again letting its guard down, abandoning the field before the battle is won, just as it did years ago? We must ask because the evidence is lining up that higher inflation is headed our way.
A couple of things to cite. If China is opening its economy once again, it will mean another commodity price boom that will affect everything. Gasoline prices have started inching their way higher as well and are now up about 10% from their December lows.
Higher interest rates are hitting consumers, visibly in credit card interest rates, while rising borrowing costs for private sector producers must be passed along to consumers at some point.
But perhaps most significant is the steep drop in the U.S. dollar since last fall.
A 10% drop in the dollar is substantial. The U.S. imported $3.4 trillion in 2021, according to the CIA World Factbook, which lists these leading imports and major U.S. import partners:
Imports – commodities
Cars, crude petroleum, computers, broadcasting equipment, and packaged medicines (2019)
Imports – partner
China 18%, Mexico 15%, Canada 13%, Japan 6%, and Germany 5% (2019)
As the dollar exchange rate moves lower, prices rise for American consumers of imported goods, and that becomes just one more factor signaling coming consumer price acceleration.
This is a period of sudden market reversals, sharp changes, and the inevitable reckoning for years of reckless money printing and compounding debt.
We remember a gem of obfuscation from former Chairman Alan Greenspan, who said, “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.”
Over the years we have developed a preference for monetary history over official pronouncements. With history as our guide, we suggest that you protect yourself, your family, and your retirement with gold and silver.
If you’re interested in investing in precious metals, let us provide you with a free one-on-one consultation.
The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice, and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.