The financial markets are often criticized for their short-term focus, particularly when responding to inflation expectations. A prevalent narrative has emerged around the Federal Reserve’s goal of maintaining a 2% inflation rate over the next decade. However, this perspective appears overly optimistic, as it fails to consider pivotal elements such as the effects of unchecked government spending and the potential shortages of commodities arising from increased infrastructure demands. The gold market, in particular, offers a compelling counter-narrative. This precious metal serves as a reliable indicator of inflation, suggesting that the economic landscape of the next decade may be fraught with challenges that the mainstream expectation overlooks.
Gold has maintained its status as a hard currency for over 3,000 years, fundamentally distinguishing itself from fiat currencies, which are liabilities of governments. Its inherent value lies in its ability to preserve purchasing power against inflation, irrespective of various contributing factors, including excessive fiscal policies and the decline of fiat currency value. Historically, the relationship between gold and inflation has been significant, as gold price movements tend to reflect real inflationary pressures more accurately than conventional measures such as the Consumer Price Index (CPI). Given this perspective, one should expect gold’s value to align with true inflation, reinforcing its role as a unique benchmark against which to gauge economic conditions.
A closer examination of the gold price in relation to the reported CPI over the past 50 years reveals a notable divergence. Contrary to the idea that gold’s price tracks government-reported inflation closely, it has substantially outpaced official CPI figures. This discrepancy raises substantial questions about the accuracy of the government’s inflation calculations. Revisions made to the CPI since the 1980s have seemingly diluted its accuracy, steering attention away from the original method by which inflation was assessed. The absence of significant criticism regarding these changes over the past four decades is notable, suggesting a complacency in how inflation data is treated and interpreted.
Prominent economist John Williams, founder of ShadowStats, has been a vocal critic of the revised CPI methods, consistently advocating for a return to original inflation calculation methods. By comparing current CPI figures with pre-revision measurements, alongside gold prices, Williams’ data indicates that gold better reflects the inflation rates originally intended by these earlier calculations. While no approach to measure inflation can be deemed perfect, the persistent alignment between gold prices and original CPI estimates calls into question the government’s current methodologies and their implications for evaluating economic realities.
Several key adjustments made to CPI calculations deserve attention as they elucidate the broader implications for the American Dream. The “substitution effect,” for instance, allows for a misleading assessment of inflation by suggesting that changes in consumer preferences (like switching from steak to hamburger) do not denote any loss in purchasing power. Moreover, the exclusion of financing charges from inflation calculations ignores the real burden consumers face when loan and credit rates rise. Additionally, the hedonic adjustments made on goods, like technological upgrades in smartphones, define price increases as non-inflationary, obscuring the actual eroding of consumer purchasing power in the process.
A further layer to this inflation narrative involves the measure of money supply known as M3, which has been largely ignored in contemporary discussions about inflation. Renowned economist Milton Friedman famously linked inflation to an increase in money supply, suggesting that inflation results from a mismatch between the growth of money supply and economic output. Observing trends in M3 can provide additional insight into inflation dynamics, particularly as the current economic landscape is pressured by expansive fiscal policies and monetary stimulus measures. As such, keeping an eye on metrics like M3, as well as commodity prices and gold, could be pivotal in understanding and managing inflation risks, despite mainstream narratives suggesting that inflation is under control.