The Impact of Inflation
There’s a lot of discussion about inflation “eroding purchasing power” but what does that mean? It means that money doesn’t go as far because the price of goods and services has gone up. And if wages/income don’t rise at the same rate, the daily cost of living could quickly become an economic hardship. When consumers are confronting an affordability crisis, it can dramatically slow economic growth. So, the impact of inflation is pervasive and quite far-reaching. Quicken Loans summarizes the implications of unchecked inflation on consumers and the broader economy as follows:
1. Lost Purchasing Power
The most obvious impact of inflation is the loss of purchasing power. As purchasing power erodes, many feel the impacts on their budget. But those on a low income or fixed income often feel the effect the most. As inflation takes hold, it’s important to monitor how well your income keeps pace with the changes.
2. Higher Interest Rates
The Federal Reserve has a relatively limited toolkit to tame inflation. The option they commonly turn to first is usually raising interest rates. As the Fed pushes interest rates higher, it gets more expensive to borrow money … This means rising interest rates impact household purchases across the country. If you have any debt with a variable interest rate, you’ll face higher costs as your interest rates increase.
3. Higher Prices for Everything
When everything is more expensive, the impacts are felt by everyone. After all, it’s impossible to go without the basics such as food or electricity. But with rising costs, it can become more difficult to make ends meet. The older and lower-income wage earners are the first to feel the bite of higher prices. But eventually, it works its way up the income chain and begins to threaten companies or even entire industries.
4. Economic Growth Slows
As inflation runs rampant, the Fed tightens its monetary policy. With the money supply drying up, credit becomes more expensive and credit requirements tighten. The cost to borrow money is intentionally increased with the hope that this will decrease consumer spending and slow inflation. However, consumers looking to make major purchases will find this challenging. Since most need credit to make a major purchase, the end result is that it slows down the economy.
5. Anti-Inflationary Measures Can Cause a Recession
Inflation is a major threat to the economy. But as the Fed tries to adjust the market with monetary policy and interest rate hikes, sometimes it overcorrects. If the market isn’t ready for the Fed’s actions, that can mean lower economic growth for the country. When this happens for one quarter, it is usually referred to as a contraction. But if this happens for two quarters in a row, it is generally considered the start of a recession.1https://www.quickenloans.com/learn/effects-of-inflation
The Precious Metals Hedge
Precious metals are generally considered to be an “inflation hedge” because they’re in limited supply and their rarity affords them intrinsic value. They are not subject to the policies of any government or political body. Rather, their value is confirmed by a long history of price stability from prior generations and even earlier civilizations. And, since they are priced in U.S. dollars, as the buck depreciates, their value increases.
Perhaps most critical of all — gold, silver, platinum, and palladium all meet all the requirements of sound money which includes inherent value, durability, portability, and divisibility.2https://www.hardmoneyhistory.com/why-fiat-currency-is-bad
The Swiss National Bank commented on the importance of “sound money” during the global pandemic back in 2020 stating:
“History shows that sound money is a fragile accomplishment. Money is sound when its value is stable and it is thus able to perform its functions as a medium of exchange, a unit of account and a store of value. Sound money creates security and trust, which in turn promotes social harmony and cohesion … These days, central bank money is paper money, which means the issuing of money is completely flexible. If a central bank applies this flexibility appropriately, it can keep the value of money stable and limit the damage to the economy in the event of a crisis. However, paper money has often proved to be decidedly bad – with disastrous consequences.”3https://www.snb.ch/en/publications/communication/speeches/2020/ref_20201008_tjn
Those “disastrous consequences” are brought about by poor fiscal policy, excessive government debt, a loss of confidence in currency valuation, and highly inflationary policies.
Precious metals which are commodities, have demonstrated strong resilience in the face of inflation and according to Goldman Sachs “provide a direct hedge against negative commodity supply shocks, which tend to depress bond and stock returns as interest rates rise, as well as providing a hedge against lower stock returns as rising prices cause GDP growth to slow.”4https://www.goldmansachs.com/insights/articles/which-commodities-are-the-best-hedge-for-inflation
2025 Inflation Warnings
Back in 2023 Deloitte created four scenarios for its inflation outlook for 2023-2025. It included a host of uncertainties related to consumer spending, Fed policy, labor markets and the health of global supply chains. They envisioned four scenarios based upon where inflation would potentially “land” relative to the Fed’s target rate of 2% inflation and the resulting implications for consumers, businesses, and the economy.
Their projection for 2025 forecasts a “crash landing” where inflation remains high, geopolitical conflicts create supply shocks, China’s economic rebound triggers higher demand in energy markets and a strong response from the Fed is warranted.5https://www2.deloitte.com/us/en/pages/operations/articles/the-inflation-outlook-four-futures-for-us-inflation.html
Global X lays out five specific risks for the economy in 2025, and the very first, Tariffs, Taxes and Policy Sequencing outlines an inflationary combination of policy shifts that would, in fact, require a potentially damaging Fed response:
“While we remain optimistic about the U.S. economy given the possibility of policies that help support a manufacturing recovery and small-cap business investment, a new policy regime brings important risks to consider. The combination of tariffs that increase goods prices, tax stimulus that fosters demand, and changes to immigration that trigger wage increases are all inflationary. This potent combination would follow the most aggressive Federal Reserve tightening since 2001 to tame the fastest rate of price increases in about 45 years.”6https://www.globalxetfs.com/inflection-points-five-risks-for-2025-keeping-us-awake/
If the policies of the incoming Trump administration prove to be inflationary expect rising prices, a consumer affordability crisis, recession chatter, and the demand for precious metals to increase since the link between inflation and precious metals is well established. According to London-based macroeconomic research and technology company, MacroSynergy:
“Theory and plausibility suggest that precious metal prices benefit from inflation … This makes gold, silver, platinum, and palladium natural candidates for hedges against inflationary monetary policy. Long-term empirical evidence supports the inflation-precious metal link.”7https://macrosynergy.com/research/inflation-and-precious-metal-prices/#inflation-and-precious-metal-prices
This article was brought to you by Orion Metal Exchange, a top-rated precious metals dealer with “live” product pricing, full price transparency, and best-in-class customer service.
Get a FREE Investor Kit and up to $30,000 in FREE metals (on qualifying purchases).
REPRESENTATIVES ARE AVAILABLE NOW AT: 1-800-559-0088
1 https://www.quickenloans.com/learn/effects-of-inflation
2 https://www.hardmoneyhistory.com/why-fiat-currency-is-bad
3 https://www.snb.ch/en/publications/communication/speeches/2020/ref_20201008_tjn
4 https://www.goldmansachs.com/insights/articles/which-commodities-are-the-best-hedge-for-inflation
6 https://www.globalxetfs.com/inflection-points-five-risks-for-2025-keeping-us-awake