Inflation, Spending Habits, and Gold
Recent reports about inflation reveal that prices are continuing to rise above the Federal Reserve’s 2% target, year over year. The Core PCE came in at 2.6% YOY, slightly higher than the 2.5% expected. But the real impacts of inflation are perhaps not measured by statistics, but rather by perceptions. Currently, 40% of Americans are concerned about their ability to pay necessary bills. This exceeds the amount of angst they felt during the Great Recession, when 37% felt the same level of concern. Rising prices have led to rising household debt levels, which have reached a record $17.69 trillion. Higher debt levels and higher interest rates to service this debt have added to the inflation impacts experienced by many Americans. Inflationary conditions have also impacted the gold price, which is 56% higher than it was at the start of Covid-19, in January of 2020.
Americans Skipping Meals
What does it say about food prices, when 27% of Americans skip meals to lower the impacts of grocery bills to their household budgets? Regardless of what politicians say about “inflation being lower now”, the impacts of inflation only increase as time goes by.
That is to say, even if the rate of inflation is only 2.6% YOY, it must be added to how much prices already increased the previous year, and the year before that. A decrease in inflation does not mean a decrease in prices. Rather, a drop in the inflation rate simply means prices are still rising, but rising a little slower. At the same time, wages or incomes for the average American are not keeping up with the pace of price increases over the last few years.
But grocery bills are not the only place Americans are cutting back. 80% of Americans now consider visiting a fast food establishment to be a luxury. A new phenomenon of posting pictures of receipts from restaurants on social media adds to the feeling. One example is a receipt from “Five Guys Burgers and Fries” that went viral, displaying a $24 total for one person to have a burger, small fries, and a soda. Granted, Five Guys is on the upper end of fast food prices, but $24 used to be the price for a full steak dinner at a middle class sit-down restaurant. Even if the inflation rate were to drop to 0% (not likely), today’s higher prices would remain. The only way prices will come down is if “deflation” occurs, and governments worldwide do their best to prevent deflation.
What is Wrong with Deflation?
Why wouldn’t governments or the Federal Reserve want deflation, or lower prices for consumers? In a word, taxes. Inflation causes the prices of everything to rise. When the prices of goods increase, so do the sales taxes levied on those goods. When prices fall, so do the sales tax receipts that help pay for local government services. When prices rise, so do wages - even if they don’t rise at the same level as prices. Higher wages means higher income tax revenue for state and federal government programs. Deflation could lead to lower wages, or more importantly, lower stock prices. When the costs of goods drop, people often postpone major purchases to see if prices will drop further. Fewer sales leads to lower revenues, which leads to lower stock prices, and lower income taxes. Lower stock prices often lead to stock market losses, which cannot be taxed.
With 76% of June income taxes being used for interest payments on the national debt, the government will fight tooth and nail to keep deflation from happening, and keep inflation growing. Local, state, and federal government spending plans require ever-increasing revenue streams that can only grow during inflation. The only other way to increase revenues is to raise tax rates themselves, which is often politically unpalatable. So in spite all the jawboning about pursuing policies to “fight inflation”, governments and central banks will do their best to keep inflation growing at least a little bit. While deflation is a boon to consumers who enjoy lower prices, it can make life difficult for governments needing tax revenues.
Common Sense Solutions and Gold
One of the methods to navigate in an inflationary environment involves lifestyle choices that are easier to make before inflation gets out of hand. A simple way to be able to maintain financial confidence during times of inflation, is to develop a lifestyle of spending less than your income - especially when it comes to housing costs and automobiles. Housing and automobile expenses are two items that cause most of the financial headaches for Americans, when they overspend. By buying less car and house than you can afford, it leaves room for other price increases when they occur, without changing your lifestyle. Spending less than you make also implies that you are storing funds in some kind of savings, and it certainly matters what you are saving in.
Traditionally, Americans have saved money in a savings account at their local bank. It used to be a simple way to earn some interest, while maintaining liquidity for emergencies. Unfortunately, even though the interest rates for loans have increased 3-4 times in the last couple of years, the interest rates on most savings accounts continue to average less than 1/2% per year according to the FDIC. Spending less than you make will help you deal with inflation in the here and now, but in order to overcome inflation in the long run, you have to save part of your money in something that grows at least as much as inflation.
Thankfully for us all, we can protect our future purchasing power simply by purchasing and owning physical gold. By taking a portion of our savings (which we routinely have when we spend less than our income) to buy gold, we can overcome the price increases experienced over time due to inflation. The official food inflation rate from 2020 until today is +22%. Dollars stored in the average savings account in 2020 would purchase only 80% as much food today. Meanwhile, funds stored in gold (+56% since 2020) would purchase 134% as much food today. Spending less and owning gold can help us defeat inflation in both the short and long term.
