Inflation in 2021: What to look for.
This spring the first whispers began about that ghostly market presence that has not been seen in many decades – inflation in 2021. Traders hung on Federal Reserve Chairman Jerome Powell’s every ‘dovish’ word. Bond market moves spooked equity markets, leaving many to wonder whether or not they were protecting their investment portfolios from the inevitable return of asset price growth.
Chairman Powell said he expected economic reopening in 2021 to cause inflation, but added that price increases wouldn’t spark interest rate changes. Inflation in 2021, in his view, would be temporary and seemingly not on target with what the central bank would like to see before it would take fiscal policy action.
But what does an inflation spike look like and how would it happen?
Going into 2021, inflation was well below the Federal Reserve’s 2% target. While some economists expect predict inflation to remain below 2%, there are other noted traders and investors who have begun to point to some worrying trends that suggest a rapid rise in prices.
Those preparing for an inflation spike like that experienced in the 1970s when inflation grew to 20%. President Nixon’s wage and price controls in the early 1970s are often credited with fueling the double-digit inflation, but rising government budge deficits also played a part. Many foreign holders of the U.S. currency and Americans though the dollar was over valued and a run on the dollar ensued.
In 1971, Nixon took America off the so-called gold standard, which mean that the American dollar became a fiat currency, which means instead of being linked to how much gold and silver is in the coffers that the U.S. dollar’s value is backed by the government that issued it. The value of the dollar was soon deflated, oil prices rose rapidly. Inflation rose from 8.8% in 1973 to over 12% later on in the decade.
By 1980, the price of gold had hit all-time highs at $850 per ounce as investors began to buy gold as an inflation hedge in their portfolios. But in the decades that followed inflation has come down to historical lows, which has helped fuel U.S. stock markets growth in recent years. Economists and traders are expecting that the bull run will end, but the timing and how that will transpire remains to be seen.
The last time inflation picked up was during the global financial crisis in 2008, but it was in the second half of the year and as the crisis wore on into 2009 the price of gold surpassed more than $1,000 per ounce for the first time in history.
Investors may be looking for yet another inflation hedge as market pundits and economists read their collective tea leaves.
Thanks to the global pandemic, consumers who could afford to do so have either paid down debt and/or boosted their savings. By some estimates, that has resulted in $2.9 trillion in excess global savings, which is estimated to grow to $3 trillion in the U.S. alone according to economists estimates. What such figures suggest is that there could be in pent-up demand for goods and services as the economy reopens. Proponents of a rapid inflation spike say that this potential for consumer spending alone could fuel rapid price increases.
The Federal Reserve Bank of Atlanta also projected real GDP growth (seasonally adjusted annual rate) in the first quarter of 2021 to be over 8%, which caught markets by surprise but further suggesting pent-up demand for goods and services.
All signs point toward inflation growth, yet the jury seems to be out on how fast and for how long such inflation in 2021 could last as gross domestic product growth surges in the U.S. and long-term fiscal stimulus measures are weighed. If economic overheating as Americans rush to spend an additional round of stimulus checks is a worry, than researchers say the prospect of inflation is real.
If history offers any guidance, however, as inflation swells so does the value of gold as a lasting storehouse of wealth over long-term market cycles. Now might be a good buying opportunity for years to come.
Call 844-824-5051 to speak with us here at Red Rock Secured. One of our precious metals experts can offer you a free consultation to help you decide what makes sense for your portfolio.
You can also learn more about opening a Gold IRA to protect your savings from inflation in 2021 by viewing this video.