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Gold And Inflation

US Inflation Hits 40-Year High

That was the headline that hit the various news feeds this past few weeks (it’s June 16th, 2022 as I write this), as inflation rose in the US to 8.6%, the highest it has been since December 1981. In the UK, the Bank of England announced that inflation there would likely exceed 11% by this coming fall (October).  So why is inflation so high in the US right now, and increasing around the world? Well before I get into that, let me explain for those who maybe don’t know, what inflation is and how it works. (Apologies if you do know what inflation is and how it works, just navigate to the next section of this article).

What is Inflation & How Does It work?

Chart illustrating inflation growth, macroeconomic indicator concept

In simple terms, inflation is the increase in the level of prices for the services you pay for and the goods that you buy. As inflation rises what you are able to buy for the value of a dollar, decreases. For example. in the late 1960’s a couple getting married and buying their first home together would look to spend around $22,500.

Today that is not the cost of a new home, it is the cost of a new car. A new car in the 60s would cost around $3,000, yet today that is the cost of a week’s vacation for some people. If you want to go and see the latest movie release from Marvel comics or the new Top Gun film, then the average movie ticket will cost you $9.50, yet in the 60’s the cost was a simple dollar. Why have prices changed so much? Because of inflation!

There are also different types of inflation. First, you have deflation. This is rare and it is the opposite of inflation, therefore prices go down and you get more for your money. There is stagflation, a combination of stagnation and inflation, so this is when the economy stagnates due to high unemployment and high prices (For those who are old enough, think 1970’s America).

Then the final one is probably the worst and that is hyperinflation. This is mega-fast inflation and it results in the breakdown of a country’s monetary system. This is an issue that countries like Zimbabwe have experienced recently where inflation has been in excess of 2000%. Currently, there are no countries with hyperinflation, however, Venezuela is experiencing high inflation with an inter-annual (April 2021-April 2022) rate of 222.3%.

How To Understand Inflation

What Causes Inflation?

There isn’t one simple reason for inflation, not one that economists can agree on anyway. There are a number of collective and variant reasons why inflation occurs. Inflation is most often caused by an increase in the money supply. When the government prints more money, each individual dollar has less purchasing power because there are more dollars chasing the same number of goods. This can cause prices to rise, as businesses pass on the higher costs to consumers.

Supply and demand is another cause. If the demand for a product is high, but the supply is low, then prices increase and this affects inflation. So things like a low supply of quality housing but a high demand for it will result in house prices increasing.

High demand for oil in manufacturing but a low supply due to possible war increases the cost of goods which increases inflation. Another way inflation is caused is a cost-push. This is when a company’s costs go up, they have to increase their prices to ensure they maintain their profits. So if I am a manufacturer of an item, and my supplier increases their costs, I have to increase the sale price and if it is an item that people have to have (like food) then the price level increases, and inflation increases.

How is inflation measured?


source: tradingeconomics.com

Inflation is typically measured by tracking changes in the prices of a basket of goods and services over time. This basket is known as the Consumer Price Index (CPI) and is calculated by the US Bureau of Labor Statistics. The more the CPI goes up, so does inflation

The CPI includes items such as food, housing, transportation, and healthcare. By tracking how the prices of these items change over time, economists can get a sense of how inflation is affecting consumers.

Inflation can also be measured using the Personal Consumption Expenditures index (PCE). This index tracks changes in the prices of goods and services consumed by households. The PCE is calculated by the US Bureau of Economic Analysis.

Both the CPI and PCE are important measures of inflation, but they can sometimes give different readings. For example, the CPI may show higher inflation rates than the PCE if there is an increase in the price of gas, while the PCE may show higher inflation rates than the CPI if there is an increase in the price of healthcare.

While both measures are useful, economists often prefer to use the PCE as it is a more comprehensive measure of inflation. There are other ways to measure inflation as well, such as tracking changes in wages or productivity. However, these measures are less common.

inflation shown by Small Shopping Cart With Cardboard Boxes

So to answer the question, why is inflation so high right now? The answer is that food prices have increased 10% compared to this time last year. Energy prices are up over 34.5% over the past 12 months, as we know from the continuing price inceases at the gas pump. And although the Labor Department reports that wages were increased by 5.2% on May 2021, the rising cost of living prevents many Americans from getting any actual spending increase from the salary hikes.

How Does Inflation Impact Investments?

Inflation is a general increase in the level of prices for goods and services. It erodes the purchasing power of investments, which can have an adverse impact on portfolio values.

Investors need to be aware of how inflation will affect their holdings. For example, a bond’s interest payments may not keep up with inflation, which can lead to a decrease in its real value.

Similarly, stocks may not perform as well during periods of high inflation. Companies may find it more difficult to grow earnings when costs are rising. As a result, investors may see a decline in stock prices.

If you have your money tied up in fixed-rate investments, unfortunately, you will be the hardest hit by inflation. For example, if you have $100,000 invested in a fixed rate bond that offers a 10% return and inflation rises to 8%, as it as done, then the actual return you get is 2% and not 10%. Of course, if inflation was to increase dramatically and go over 10% then the $100,000 you have invested will provide no return at all.

Inflation can also have an impact on retirement portfolios. One of the most important considerations when planning for retirement is inflation. Over time, the prices of goods and services increase, which means that a fixed income may not be enough to cover basic living expenses. This is particularly true if inflation is high, as it can eat away at purchasing power.

For example, if the inflation rate is 3%, then a retired person who has a pension of $20,000 will only have $19,400 after one year. As a result, it’s important to factor in inflation when determining how much money will be needed in retirement.

There are several ways to do this, such as using an inflation-adjusted annuity or investing in TIPS (Treasury Inflation-Protected Securities). By taking inflation into account, retirees can help ensure that their nest egg will last as long as they need it.

Investors should consider these effects when making decisions about their portfolios. By understanding how inflation impacts investments, they can help to protect their assets and ensure that their investment goals are met.

How Does Gold Work With Inflation?

gold bars and coins as alternative investments

Gold is often seen as a hedge against inflation. This is because, as prices rise, the value of gold typically rises along with them. There are a few reasons for this.

First, gold is a scarce resource. There is only so much gold that can be mined from the earth, and so its price tends to increase as demand goes up.

Second, gold is durable and easy to store. It does not corrode like other metals, and it does not spoil or go bad over time. This makes it an ideal investment for times when inflation is expected to rise.

Third, central banks around the world hold large reserves of gold. When inflation fears increase, central banks are more likely to buy gold in order to protect their reserves. This increases demand for gold and can push prices higher.

In a recent article, I wrote on who are the biggest investors in gold,  and I talked about how of the top ten private investors, 30% of them stipulate that the main reason why they invest in gold is that it is a good hedge against inflation.

Marc Faber is a well-known investor and financial commentator, who is often associated with his investment in gold. In an interview with Kitco News, Faber discussed his views on the current state of the economy and his reasons for investing in gold. Faber began by discussing the current state of the US economy, describing it as being in a “delayed recession.” He went on to say that he believes the Federal Reserve’s policies are “totally misguided” and that they are only delaying the inevitable. Turning to his investment in gold, Faber said that he sees it as a hedge against inflation and a way to diversify his portfolio.

Ultimately, gold is not a perfect hedge against inflation, but it certainly is one of the best. Its price can be volatile, and it does not generate an income like stocks or bonds. However, it can be a useful tool for diversifying your portfolio and protecting yourself from rising prices, especially in retirement.

I have partnered up with American Hartford Gold, to bring you their guide on how you can protect yourself against inflation, especially in retirement. You can go to their website by following this link and ordering your free copy, or you can simply click on the button below. Alternatively, if you want to know about other best gold ira companies to invest with, then check out my main gold ira companies page in the navigation.

Remember that before you carry out any type of investment, or diversification of your retirement portfolio, always speak to your financial advisor if you are not comfortable with what you are doing.

Claim Your Free Guide On Protecting Yourself Against Inflation

Written by
Nathan Tarrant

Nathan has worked in financial services, marketing, and strategic business growth for over 30 years, as well as working in internet marketing since 1998.

In 2008 after the financial crash, Nathan operated as a financial & investment advisor to delegates of the United Nations, the World Health Organization, and senior managers of Fortune 500 companies in Geneva Switzerland.

He started Gold Trends as he enjoys working with alternative investments, having advised on them in the past.

Please note: Nathan is no longer a financial or investment advisor. The information he shares on this site is purely for education and information purposes only. You can read more on the About page

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Written by Nathan Tarrant