International Forecaster Weekly

INFLATION ISN'T COMING...IT'S HERE! Will the Fed's Market Manipulation Actually Help?

Well, don’t look now, but meaningful, relevant inflation is already upon us — and has been for some time — not just here in the U.S., but all around the world. 

It shouldn’t come as a surprise either. After all, it’s the Fed’s explicit goal. And what else would you expect when the nation’s money supply (M-2) has grown by 410% since 2000 — and $3.7 trillion, or 24%, in 2020 alone?


Guest Writer | January 9, 2021

By Dave Allen for Discount Gold & Silver

We’ve been reading for months now how the Fed’s explosive manipulation of the government and corporate bond markets and Congress’ endless love of debt-financed stimulus would eventually fuel rising prices.

Well, don’t look now, but meaningful, relevant inflation is already upon us — and has been for some time — not just here in the U.S., but all around the world. 

It shouldn’t come as a surprise either. After all, it’s the Fed’s explicit goal. And what else would you expect when the nation’s money supply (M-2) has grown by 410% since 2000 — and $3.7 trillion, or 24%, in 2020 alone?

Rising Food Prices Worsening Hunger

The U.N.’s Food and Agriculture Organization’s food price index rose for the 7thstraight month in December, rising to its highest since the end of 2015.

As the chart above shows, global food prices have increased 23% over the last five years — from an index of about 87 in December 2015 to 107.5 in December 2020; That’s an average annual increase of 4.6%.

Axios’ Dion Rabouin reported this morning that on the one hand, CPI and PCE gauges are being held down in most countries by weak employment levels and minimal wage increases as well as the cost of certain purchases like hotel stays, airfares and clothing.

However, on the other hand, the cost of essential living items — especially food — has been edging higher for several years, as noted above.

It’s well-known that America’s trade wars and the raging pandemic have disrupted global supply chains and wreaked havoc on workforces across the globe. 

Additionally, like gold and most other commodities, food supplies are largely priced in U.S. dollars. 

And with the dollar having fallen to its weakest level in over 2½ years, food prices have risen by a by a fairly substantial level (4.6% per year) that people who do their household’s grocery shopping don’t find surprising. Still, the increases are hurting.

The Census Bureau’s latest monthly survey counts 29 million American adults reporting that their household “sometimes or often” didn’t have enough to eat in the last week.

That’s 14% of all adults in the country — more than one in ten Americans 18 or older. And the number rises to 18% of adults with children, 21% of Latinos and 24% of Black adults.

Just 3.4% of adults reported that their household had “not enough to eat” at some point over all of 2019.

Lisa Davis, senior VP of the nonprofit Share Our Strength’s No Kid Hungry campaign, lamented:

“It’s particularly heartbreaking because before COVID hit, we were on a pathway to end childhood hunger and had seen remarkable progress over the last several years, all of which was undone in just a matter of months.” 

Beyond Food…

What’s more, the Institute for Supply Management’s prices paid index for the U.S. services sector jumped to its highest level since early 2012 in November and hovered near that level last month.

At the same time, the ISM prices paid index for the manufacturing sector rose to its highest since December 2018.

A number of economists say markets have been steadily pricing in higher inflation since mid-last year, with 5-, 10- and 30-year breakeven inflation rates breaching their highest levels in two years earlier this week.

The breakeven inflation rate is a market-based measure of expected inflation. It’s the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity.

For a more detailed discussion on breakeven inflation and examples of how it works in real life, click here.

Despite the government’s latest inflation report, claiming that consumer prices are up % for the year as of December, other credible sources, like John Williams’, show actual inflation being as high as 9%.

In fact, applying the government’s methodologies that were in place in 1980 (we believe those methods are a more accurate reflection of prices than those in use today), Williams shows that the annual increase in consumer prices hasn’t been below 5% since the late 1980s.

In any case, the Fed’s QE+ and substantially more fiscal stimulus likely will only make inflation higher. The question is, can that turn out to be a good thing? More on that in a moment.

Why Inflation Matters

Inflation is closely tied to wages, and some say that years of low inflation have contributed to a lack of income growth over the past decade for most American workers.

Low wage growth has been a major influence on the rising inequality gap in America. And higher inflation could lead to bigger paychecks for most Americans, and a higher standard of living.

Last summer, the Fed announced a significant change in how it manages interest rates that could cause inflation to more than double. Chair Jerome Powell announced the proposed change by saying the Fed is hoping that higher inflation will boost wage growth, which has been anemic for well over a decade (some say for over 30 years).

He said, "The single most important thing that we can do is support a strong labor market." 

The Fed’s massive purchases of government and corporate debt will put pressure on inflation over the longer run if not sooner. 

Its creation of the corporate facilities last March marked the first time in history that the Fed committed to buying corporate debt, ostensibly to prop up the economy. 

The plan in reality went far beyond previous quantitative easing, in which the Fed bought up government-backed securities. 

However, some people are saying if the Fed's QE+ and inflation policy change succeed in juicing inflation, they could have a significant — i.e, positive — impact on Americans' lives and financial well-being. 

            They point to the Fed's low-interest rates already translating into low borrowing rates for households and businesses — for everything from auto loans and home mortgages to corporate expansion — will likely remain ultra-low for several more years.

Higher inflation, however, means that prices for goods and services would likely go up for most Americans. 

But the optimists claim that technological advances, and the fact that many U.S. consumer goods are manufactured overseas, would probably keep prices rising more slowly than wages.

Others, however, say beware. In an opinion piece in Wednesday’s Wall Street Journal, former head of the FDIC Sheila Bair and Lawrence Goodman write:

"While there’s little evidence that the Fed’s corporate debt buy-up [has] benefited society, its costs and unintended consequences are significant, with clear damage to competitiveness and productivity.”

Instead of helping to keep employees on payrolls and businesses from failing, they believe the Fed programs have resulted in “a huge and unnecessary bailout of corporate debt issuers, underwriters and bondholders.”

Thus far, the Fed’s programs and policies have mainly led to a widening of income inequality, with wage increases largely focused on white-collar workers and their executive-level bosses.

The rest of the workforce is either hanging in low-wage limbo or, worse, jobless.

In short, the Fed has a long way to go to show that its new inflation push will benefit all households, especially those at the bottom and middle of the income ladder.