An Honest Look at Inflation

All the news articles you read are reporting that inflation is going through the roof and the world is about to end. Those headlines will earn clicks, but are they true?

I set out to discover for myself if what the news is reporting is true. I went to the source, the US Bureau of Labor Statistics. It’s an amazing source of information.

Based on August 2022 numbers, if you feel like you’re paying more for airfare, gas at the pump, and household energy you’re right! They’re up over 21% in the last twelve month.

Airfare is up 33.4%, gas is up 25.6%, household energy is up 21.2%, all from twelve months ago.

Personally I’ve noticed it most at the supermarket where prices are up 13.5%. That adds up over the course of a month.

Interesting enough, I haven’t noticed it as much eating out. But, then again, when eating out I’ve pretty much accepted that whatever its costs is fine because we don’t have to do the dishes and clean up.

To save you from reading a wall of words, I’ve provided you the chart below that gives a good picture of what exactly is going on with inflation in different segments of the economy.

This Should Not Be Shocking

The fact that inflation is happening shouldn’t be a shock to anyone. When you print more dollars and put them into circulation at the rate that was happening during the pandemic, about the only thing you can count, other then the money coming off the printing press, is that more of them in circulation will decrease the value of the dollar. And what naturally follows is that it takes more dollars to buy the same goods and services.

While run away inflation is a real risk, so is deflation. That sounds crazy to say when we’re talking about some prices increasing as much as 33%, but it can happen. The last time was between 2007–2008.

Here’s how it can happen: prices come down as a result of decreased demand. As prices decrease to find the price point where buyers will buy, they can go below the cost of producing those goods and services.

At that point those businesses can’t make money. They need cash, but it’s harder for them to borrow money or simply too expensive because of the high interest rates which are in place to counter inflation in the first place. Ultimately, companies go out of business.

As companies go out of business the unemployment rate starts to increase. As people lose jobs they can’t pay their bills. One of those bills is likely a mortgage. As people are late or worse, default on their mortgages, banks’ balance sheets start to get out of balance. Then banks start to fail.

I don’t want to paint a dooms day picture, but does this situation sound familiar? If not, Google what happened in 2007–2008 for more details.

Just like inflation, when deflation happens it can get out of control fast, really fast.

If you want to see a situation where exactly that happened other than 2007–2008, go further back and look at the 1929 collapse of the markets and the economy.

While the situation in 1929 began as a recession, demand for goods kept going down, prices dropped and it all came crashing down. No pun intended.

We have many more controls in place than we did in 1929. But, make no mistake, the Federal Reserve has their work cut out for them with this situation. They’ll need to thread the needle. Its’ going to be dicey, but I’m still betting on America.

To make us all feel a little better and end on a more positive note, we’re not in the worst shape compared to some other countries.

When I was talking with Jason Cozens, the CEO of Glint, on EDGE Episode 399 about paying in gold, he explained that inflation in the UK last month was running 10%+ and seemed to still be picking up.

Crazy part of that conversation is that Jason was explaining that gold buys more than it did forty years ago compared to the dollar that only buys you about 10%. Should we go back to paying in gold? Jason thinks so, see what you think after listening.

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SOURCES: BUREAU OF LABOR STATISTICS. DATA AS OF AUGUST 2022, YAHOO FINANCE

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