Consumer price inflation is rising. In the US, it was 6.2% in October 2021; in Germany, it is most likely to reach 6.2% in November, and in the eurozone, it went up to 4.9% last month. Of course, that’s not all. For instance, German producer price inflation reached 18.4% y-o-y in October, the highest rate since 1951; in Italy, it rose by as much as 20.4% y-o-y. In the US, housing prices were up 19.5% y-o-y in September (down from 19.8% y-o-y in October), and in the same month, German house prices rose 13.3% y-o-y.
These numbers may suffice to understand that goods price inflation – the sustained rise in goods prices across the board – is rearing its ugly head. Or isn’t it? Perhaps it is just a temporary spike in goods prices, a surge that will be short-lived, to be followed by moderate rates of rising goods prices? Well, that’s what central bankers, politicians, and many mainstream economists are telling people – in an effort to keep inflation expectations from rising.
Because if people expect goods price inflation to rise and remain high in the future, they will adjust their wage, rental and credit agreements. For instance, employees will demand higher wages, property owners will ask for more money for the right to occupy a home, and lenders will increase their lending rates. If this is the case, the economy adjusts to higher goods price inflation, which is not only costly and leads to hardship for the broader population, but will also render the redistributive effects of goods price inflation ineffective.
Inflation is a politically induced process of redistributing income and wealth among people. It creates winners and losers. For example, as goods price inflation rises, debtors find relief, as they will be able to pay back their liabilities with money that has a lower purchasing power. The lender gets the short end of the stick. Owners of assets, which increase in price, benefit while the holders of money suffer: They can buy fewer assets for their money.
As things stand, central banks are now busy increasing the money supply, which is the direct result of the massive monetization of government debt. The resulting increase in the quantity of money, in turn, drives up goods price inflation – in the form of higher consumer goods prices and/or higher asset prices (that is, the prices of, say, stocks, bonds, housing etc.). Once the inflation process has started, it is rather difficult to stop it, politically speaking.
To end the inflation process, interest rates must be raised and the increase in the quantity of money reined in. The higher inflation has become, and the higher inflation expectations have risen, the more restrictive monetary policy must be.
Unfortunately, central banks shy away from abandoning their inflationary policy course, fearing that stepping on the brakes would plunge economies into recession and crash financial markets.
Meanwhile, the US Federal Reserve (Fed) Chairman Jerome Powell suggested that policymakers discuss accelerating the current “tapering timetable” of monthly bond purchases in December, which would open the door for earlier interest rate hikes. Clearly, there is no desire to change the course immediately. What seems to be intended is that people expect the Fed to do something about the inflation at some point in the more or less far future and that this will suffice to keep them sitting still. So far, it seems to be working, as central banks are getting away with it. There is no upheaval among the population and loud complaints about higher goods price inflation. And while the money supply continues to expand at elevated rates, goods price inflation will likely remain high in the years to come, and people will probably get used to it – as they have become used to extremely low interest rates. This outlook seems to make sense in light of Mr Powell saying, “it’s probably a good time to retire” the word “transitory”.
Of course, the victim of an ongoing inflationary monetary policy, of a monetary policy allowing for higher goods price inflation, will be the purchasing power of money. Especially since the nominal market interest rates will be kept low by central banks so that the real, i.e. inflation-adjusted, interest rate will remain in negative territory. In such a regime of financial repression, physical gold and silver are viable options to escape the “inflation tax” on money.
The exchange value of these precious metals cannot be debased by monetary policy. They also do not carry a default or counterparty risk. Especially for longterm oriented investors, holding physical gold and silver as part of their liquid portfolio should be particularly worthwhile, as in the coming years, especially when purchased at current prices – which we consider to be relatively cheap, appearing to promise a substantial upwards potential –, they can be expected to be both risk-reducing and return-enhancing.
Thorsten Polleit. Chief Economist at Degussa