Is inflation heating up now?

The Fed hasn't been able to generate sustained 2 percent inflation in its preferred measure for years.
Classic Plymouth in sepia

There has been a lot of talk lately about inflation coming back with a vengeance because of Congress’s stimulus spending and money printing by the Federal Reserve. Gold has been heating up again, and the “gold bugs” are just about salivating. You can tell something is going on because of the significant increase in gold commercials on TV for the various firms that sell it. The sales pitch is the same as it was in 2011 — “Protect Your Wealth.”

Inflation certainly occurs over time, especially with cars.

I’m not buying the argument. While I agree that inflation is coming back someday, I don’t think it’s now. There are still too many deflationary forces at work. The Fed would love to create some inflation and have been trying to for years now. It hasn’t worked.

The Fed announced recently that it had concluded its internal review of how it will handle inflation. They are shifting from targeting 2 percent inflation to focusing on maximum employment, with inflation secondary. By their measure, inflation has run below 2 percent in the last decade, but the Fed now will allow inflation to run higher than 2 percent as long as employment is expanding. Fed Chairman Jerome Powell clarified that the bankers won’t be bound by any pesky math. The Fed won’t say over what period the 2 percent average inflation will be calculated, how much higher than 2 percent it will be allowed to run, or even what employment level will be considered “full” employment. They won’t define it, but they’ll know it when they see it. Really?

The immediate effect of this is nothing. The Fed hasn’t been able to generate sustained 2 percent inflation in its preferred measure for years. Inflation will have to reach that level before it can run higher. That’s not likely a 2020 concern or even a 2021 concern, but it will be at some point.

Buried in the Fed’s statement on inflation was a recognition that, due to demographic factors, productivity growth has slowed dramatically since the 1990s. The estimated long-run economic growth rate for the U.S. has fallen from 2.5 percent to 1.8 percent. As the Fed and Treasury pump more money into the economy to “save” us, they’re pouring fuel into a slow-running machine. Eventually, the outcome will be inflation once the extra money is used to increase demand beyond what it otherwise would be.

As many of you know, I’m a car guy and have always loved cars. I have often joked that I’ll never retire because I need to support my car habit. I’m getting better, though.

Inflation really shows up big when it comes to cars. My first car was a 1953 Plymouth that my father got me in 1963 when I turned 16. He paid $175 for it. It looked like a big brown turtle, but it was mine, and I did everything I could to it to make it go faster. Of course, fast is a relative term here.

A year later, I traded up to a 1962 Chevrolet Corvair. Because it was a rear-engine sports car, it was sometimes called the “poor man’s Porsche.” The Corvair was badly maligned by Ralph Nader in his 1965 book “Unsafe at any Speed.” It wasn’t really a fair assessment of the car. But it was a fun car to drive, and it was the car in which I learned how to drive a race car by driving back roads and deserted parking lots.

In 1966 I went crazy and bought a 1965 Oldsmobile 4-4-2 for $3,500. That was a lot of money then. The 4-4-2 was one of the so-called muscle cars of that era, and it was REALLY fast. It was a foolish thing for me to do as I was still a senior in high school, working part-time at the local drug store. But I really wanted that car.

Unfortunately, it wasn’t long before I got caught drag racing and the fine and citation ran the insurance cost up to more than the car payment, and I had to sell it. My father kept it and traded me his Ford family sedan. I can tell you that it’s tough to see in one of those things while you’re driving with a bag over your head so that nobody recognizes you.

The point of this is that inflation certainly occurs over time, especially with cars. Today the average price of a new car in the U.S. is about $38,000, and only 10 percent of the population can afford a new car. Cars today are expensive for a lot of reasons. First, the government has imposed more safety requirements over the years. Second, it has increased fuel efficiency requirements. This is an example of inflation by fiat – businesses pass along the cost of complying with laws and regulations to consumers.

If you want to look at something more immediate, food prices have skyrocketed this year. Meat and poultry have jumped 11 percent, with beef and veal prices spiking 20 percent. Pork has jumped 8 percent. Egg prices are up 11 percent. There is also plain old monetary inflation. Inflation has been for low the last 20 years, but it hasn’t been zero either.

The problem is that incomes have barely gone up at all, relatively speaking. And that is what we will see more of – wealthy people with the ability and means to protect themselves from inflation, and low-income people who are crushed by it. Inflation is an inequality machine.

Anyway, this is a story about inflation, or the lack thereof for now. Remember, the Fed is telling us it will not react to rising prices, which will keep interest rates exceptionally low even as inflation, when it finally arrives, eats away at purchasing power. Allowing the gap between interest rates and inflation to expand gives a tremendous benefit to borrowers at the expense of savers. I’ve talked about this before. It is financial repression by another name, and it benefits the biggest borrower, Uncle Sam, more than anyone else.

Again, I don’t think significant inflation is coming soon, but the Fed just gave us ample notice of how it plans to proceed for years to come. Their previous approach lasted almost 50 years. We’d be wise to take them at their word and map out a plan of action before the need arises. Thanks for reading.

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About Nick Massey

Nick Massey is President of Massey Financial Services in Edmond, Oklahoma. Nick can be reached at www.nickmassey.com. Investment advice offered through Householder Group Estate and Retirement Specialists, a registered investment advisor.