Economists have forecast the rise of inflation for several years, only to be disproved. There’s reason to believe, however, that 2018 will be different—that prices will finally rise in a more sustained pattern, forcing stock- and bond-market investors to react to a new trend. “An unanticipated acceleration in inflation is probably the biggest risk for markets in 2018,” says Larry Hatheway, chief economist at GAM Investments.
The latest data show a 2.2% increase in the CPI (Consumer Price Index), which indicates growing inflation, and a 3.0% increase in the PPI (Producer Price Index). In addition, the final demand good index rose by over 4%, measured year-over-year. These high numbers suggest that the costs of manufacturing are increasing, and, while manufacturers are currently absorbing the higher costs, they are likely to pass them on to the consumers, which will further boost inflation.
Despite these obvious signs, our federal government is ignoring this threat to the US economy. We have heard outgoing Fed chair Yellen speak of “low inflation”, and she has claimed that we will see an increase in GDP in 2018 of over 3% while inflation will remain low.
Honestly, it’s doubtful that inflation will remain below 2% with such high economic growth. Interest rates have remained at a record low since Alan Greenspan lowered them to around 1% in the early 2000s. That means cheap money. And we have seen the consequences in the housing bubble which burst at 2008.
Let’s look at some numbers for the money supply:
Monetary Base: 2000: $597 billion. 2017: $3.927 trillion. An increase of 558%
M2 Money Supply: 2000: $4.94 trillion. 2017: $13.8 trillion. An increase of 180%.
Treasury Securities: 2000: $292 billion. 2017: $1.16 trillion. An increase of 300%
Derivatives: 2000: $93 trillion. 2017: $562 trillion. An increase of 500%
Whichever inflation indicator we look at—CPI, PPI, wage growth, etc.—the story is the same. Inflation is growing. However, this shouldn’t come as a surprise since the Feds have significantly increased the money supply. At the same time, they have remained quiet about the spiking inflation rates. Why? Because they want to keep interest rates low.
If the Feds were to admit that inflation is above their 2% target rate, they would need to increase interest rates, probably to somewhere around 3%. The result of higher rates? A burdened economy, slower economic growth, difficulties in servicing our increasing national debt and stock market selloffs. More importantly, it would burst the financial bubble we are currently living in—a bubble the Feds have been contributing to. So, it’s no surprise the Federal Reserve is ignoring the growing inflation.
Most likely, the Federal Reserve is not going to push interest rates higher, and experts expect only two rate increases in 2018. Historically, inflation is always bullish for gold. Therefore, the expected Federal Reserve position should signal every savvy investor that gold will go much higher in 2018 adjusting its price to the rising inflation.