The Inflation Train Is Nowhere Near Top Speed

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The Inflation Train Is Nowhere Near Full Speed
Public domain photo from National Park Service

From Birch Gold Group

Federal Reserve Chairman Powell and other members of the Fed have been using the term “transitory” to downplay the threat that the last 16 months of skyrocketing inflation would last.

But inflation has been sharply on the rise since March 2020, with only a minor pause toward the end of last year before rising even more sharply since January 2021. Two Fed officials dissented in June of this year, but Powell’s money-printing habit hasn’t slowed.

The “light at the end of the tunnel” for the Fed? A miniscule .1% (one tenth of one percent) down tick in the official monthly inflation report this August.

You can almost hear the relief in the Fed’s chatter… “See, we were right! It was only transitory inflation, and it’s already going down! There’s nothing to see here, move along, buy more stocks.”

Don’t crack open the champagne just yet.

Unfortunately for us, the Fed’s optimism seems misplaced. That 0.1% reduction in monthly official inflation leaves us with a 5.3% annual inflation rate, more than 2 1/2 times higher than the Fed’s official inflation target.

And if you think everyday folks have it rough, small businesses have taken a major hit:

Inflation for businesses reached a year-over-year rate of 8.3% — the metric’s highest level since at least 2010.

On top of that, consumers are waking up to the reality that inflation won’t be “transitory,” but instead will likely stick around for a few years.

That’s because once inflation begins to gain velocity, it’s hard to stop. Inflation has serious momentum, just like a train. A fully-loaded modern freight train weighs tens of thousands of tons and needs over a mile to make an emergency stop. A controlled, safe stop takes much longer.

That very momentum is what Jim Rickards was concerned about back in February:

If inflation does hit 3%, it is more likely to go to 6% or higher, rather than back down to 2%. The process will feed on itself and be difficult to stop.

That’s darn near prophetic, isn’t it? Just to be clear, we haven’t seen 6% inflation (yet). Still, based on Jim’s thinking, if the Fed keeps printing money after inflation has already passed 5%, there’s a good chance the U.S. could see at least 10% “official” inflation before finally backing off.

Because that’s how long it takes for the train to slow down.

Wolf Richter used official Fed data to illustrate that most Americans think inflation will still be rising at a red hot clip of at least 4% three years from now, all the way out to 2024. And that same article also revealed that older Americans who were alive during the intense inflation of the 1970s think the future is much darker:

The people who went through the last bout of massive inflation as adults in the 1970s and early 1980s, the people who have actual experience with large-scale inflation and remember what it was like – the over 60 crowd – they expect inflation to hit 6.0% a year from now

Based on his Wikipedia page, Jim Rickards earned his college degree in 1973. Presumably, he remembers the economic malaise of the 1970s clearly…

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If that plays out, it means the current trend isn’t letting up. It also means inflation won’t be cooling off any time soon. Which underscores the point that inflation isn’t any more transitory than our metaphorical train. It takes a long time to get up to speed, and even longer to slow down.

There’s a bigger problem, though.

Manufacturers see “raging inflation” of 20%

Producer prices, the inflationary pressures on manufacturers, is out of control. This needs a little explaining so you’ll see how it will affect the prices we pay in the near future.

Investopedia, offers a fairly simple explanation of inflation at the producer level (producer price inflation, or PPI) and how it’s different from consumer price inflation (CPI):

The PPI is somewhat similar to the CPI with the exception that it looks at rising prices from the perspective of the producer rather than the consumer. While the CPI looks at final prices realized by consumers, the PPI takes one step back and determines the change in output prices faced by producers. [emphasis added]

Here’s a brief example: The final price of a shirt you might consider buying has a lot of production price inflation (PPI) packed into it…

When a farmer pays more for their cotton seeds and fertilizer, he has to charge more for the cotton after it’s harvested. That means cotton mills pay more, so the finished fabric ends up costing more.

And that inflationary effect is additive.

The farmer doesn’t just buy cotton seeds and fertilizer, he also buys gas to run his tractor. He pays for tractor repairs, new tires, and utilities to run the farm (and has to make enough profit to feed his family).

The harvested cotton gets trucked to a cotton mill. Textile mills also have similar expenses: transportation, utilities, repairs, maintenance and worker pay.

From textile mill to garment factory, from garment factory to wholesaler, and wholesaler to retailer… Each step in the chain, from the cotton field to the clothes rack, has its own set of expenses.

This means every single element‘s price increase adds to the final retail price of the finished product.

That’s a non-technical overview of how you might end up paying $100 for a polo shirt at Target.

Now that you understand what PPI is all about, here’s where it stands today. Wolf Richter reported on this metric recently. Today’s PPI sits over three times its 10-year average, at a shocking 8.3%.

Here’s why understanding these inflationary pressures further up the price line is important:

Economists can also forecast the future movement of the finished goods index by monitoring the intermediate index, and the direction of the intermediate index can be determined by analyzing the crude index. Essentially, the data obtained from monitoring the downhill indicators, those focused on raw materials, can be used to forecast the uphill core indicators. The PPI of finished goods provides a sense of the expected CPI movement.

What this means for you and me: This is one of the best forecasts we have indicating future inflation headed our way.

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Keep in mind, overall PPI is 8.3% now, which means we’re likely to pay higher prices as soon as businesses start passing on these increased costs.

What’s worse, those higher prices aren’t likely to come down anytime soon.

That’s because there’s raging hot 20% inflation further up the production pipeline headed our way in waves for the foreseeable future…

  • Stage 1 industries provide raw inputs like commodities (think crude oil, mineral ores and unprocessed foodstuffs): 21% inflation
  • Stage 2-4 involve processing, refining, and getting the raw materials into a usable form. Each step in the chain brings raw materials closer to use for construction or manufacturing: 21%, 20% and 12% inflation, respectively

Here’s the major takeaway: manufacturers are already paying much higher prices, and we can expect to see that reflected in the prices we pay for everything, every day.

If you thought 5.3% CPI inflation and the year-long rising trend that led up to it was bad, buckle up. This train isn’t anywhere near full speed yet, and Powell has been stoking the engine with trillions of dollars of paper money. Even if the Fed stopped today, it’ll still take this train an awfully long time to stop…

Is now the time to jump off the train, before it picks up any more speed?

Jump now, or ride to the end of the line?

If you’re concerned about the inflation we’re already seeing (let alone the inflation already on its way), it might be smart to get off the train. The faster it’s going, the more dangerous the leap will be…

Today, even though gasoline was $3.54/gallon last time I filled up the car, there’s still time to make a Plan B.

Examine your retirement savings with an eye toward your risk exposure. Consider safer investments, especially those with solid historical performance in high-inflation environments. If you haven’t already investigated self-directed retirement plans, you should know they enable you to diversify your savings into a wide variety of assets the Fed hates.

Especially physical precious metals like gold and silver. These are two safe-haven assets whose intrinsic value is not at the mercy of Powell’s inflationary agenda.

Whatever you decide, keep in mind that the inflation train isn’t even close to its full speed. As any seasoned trainhopper can warn you, the faster the train is going, the more dangerous the exit. The longer you wait, the harder it will be for you to leap off the train without getting injured. So please, make your plans accordingly.

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