Inflation: Is It Really A Problem? – Part 1
Inflation…
It’s a highly charged word that many in the financial media love to toss around on a daily basis. For example, by now you’ve probably heard about rampant hyperinflation from various fear-mongering journalists and financial “experts”.
Is there any truth to these rumors?
Before I tell you what’s really happening with inflation, and what you do need to worry about, let’s take a step back and cover the basics.
So, what exactly is inflation?
Here’s the formal definition from Investopedia:
“Inflation: The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.”
Still confused?
Let me explain it another way…
For the moment, let’s pretend you love chewing gum. You love it so much that you waltz down to the Big Lot store and buy an enormous pack of gum for ten dollars ($10.00). You vigorously chew your gum, and at the end of one year, you find you’ve emptied the entire box.
What do you do?
Being a diehard gum lover, you go back to the exact same store and buy the exact same carton of gum- yet the next year it costs $10.20.
Why?
At an inflation rate of 2% (which is a target most central banks shoot for), you’re $10 mega-pack of gum costs 20 cents more that it did last year.
Now I’ll admit, this is an extremely over-simplified example, and there are others factors to be accounted for. But the primary point I am trying to make is that your $10 dollar bill won’t buy the exact same pack of gum from one year to the next.
That’s inflation… the slow erosion of purchasing power.
Is it a problem?
Twenty cents on a pack of gum obviously isn’t going to cause any heartache.
But considering the cost of the more expensive things in life- like cars, homes, vacations, etc.- inflation adds up over time. In fact, it’s why the average car cost around $1,600 in 1950 and costs upwards of $30,000 today.
But here’s the deal…
As long as wages are rising at an equal rate- inflation actually isn’t a problem. Instead, it’s is just a circumstance of living in a fiat currency based economy.
However, problems do arise when inflation runs too high… or too low.
As I mentioned earlier, many financial experts predict the US is entering into a period of rampant hyperinflation. That’s when inflation runs exceptionally hot and the cost of goods and services rise uncontrollably. In such a case, wages wouldn’t keep up with inflation and we would all be dramatically poorer as a result.
But the fact is, according to the US Bureau of Labor Statistics, March 2013 inflation came in at 1.47%… that’s well below the target rate of 2% set by the US Federal Reserve.
What’s more, it’s not even remotely close to the hyperinflationary journey so many pundits claim the US is close to embarking on.
Now, here’s where it gets tricky…
That 1.47% figure is what’s known as core inflation- the US Government’s official way of keeping track.
In case you’re unaware, there’s a very heated argument as to whether core inflation readings are relevant in today’s economy. After all, core inflation measurements exclude food and energy- two things that everyone buys on a regular basis.
This is where commodities come in…
I’m out of time today, but we’ll take a close look at the role commodities play in the inflation debate in part 2 of this article. Be sure to tune in Wednesday so you know exactly what inflation means for hard assets in the long run!
Until Next Time,
Justin Bennett
Category: Commodity Trading
