16 February

Inflation Is Here!

Inflation is here and rising

What does that mean for gold??  Everything!
Let’s start with the following charts.
UIG Measures and 12-Month Change in the CPI+

Source: Authors’ calculations, based on data accessed through Haver Analytics.

Note: The shaded areas indicate periods designated recessions by the National Bureau of Economic Research.

The UIG (Underlying Inflation Gauge) captures sustained movements in inflation from information contained in a broad set of price, real activity, and financial data.  This includes prices at the wholesale and retail levels and asset prices including stocks and housing.  This is more comprehensive than the CPI (Consumer Price Index) and is more indicative of the real level of inflation.

The Federal Reserve (FED) has set an inflation target of 2%.  Each time the inflation rate has gone over 2% gold prices have rallied.  The most recent examples were in 2011, at the end of 2016, and now into 2018.
The causes of this inflation include the usual suspects of rising oil prices, a declining dollar, rising asset prices like stocks, and most importantly, wage inflation.

Let’s look at each one individually.  Regardless of electric cars and solar panels, the economies of the United States and most of the world are powered by fossil fuels.  As oil prices rise, prices on the wholesale and retail levels rise.  Oil is part of many industries including energy, clothing, plastics, and pharmaceuticals.

One of the stated goals of the present Administration is to bring more business to the United States and have other countries purchase our goods that are manufactured or assembled here.  A declining dollar makes our goods more attractive to overseas buyers since it makes their currency stronger and they get more “bang for their buck”.  This raises prices for our goods.

The equity markets are at or near all-time highs and housing is as well.  The Federal Reserve includes these asset prices in the UIG.

Wages had been fairly subdued going into 2017.  In the last year with the tightening labor market companies have been competing for workers and paying higher wages. There are also minimum wage increases.  Rising wages are passed along to consumers in higher prices.
Look for higher gold prices as inflation increases.