Tuesday, 27 March 2012

What could inflation look like in 2014?

Guest post by Jeff Clark of the Casey Daily Dispatch 

Most economists, especially those from the mainstream, will tell you that price inflation is widely expected to remain benign for the foreseeable future. And for those who think it could climb higher, it's usually because they think it should be higher. History has a message for them: be careful what you wish for.

There are plenty of examples in history showing that once price inflation takes hold, it can quickly spiral out of control. That's the danger we face now. Here's what I mean...

A recent article about sudden inflation by Amity Shlaes, a senior fellow of economic history at the Council on Foreign Relations and a best-selling author, provides some examples from the past century of US price inflation that was at first subdued but then abruptly rocketed to alarming levels. I put them into a chart so you could see how quickly price inflation rose within just two years from "benign" levels. I then made some projections for us today based on these historical examples.

According to Shlaes, US price inflation was 1% in 1915 (based on an earlier version of the CPI-U). Over just two years, it hit 17%. As she states, it happened because the Treasury "spent like crazy on the war, creating money to pay for it..."

Given the fact that our spending and money-printing is now out of control, I projected what our rate of price inflation would be if we matched the rates of these time periods. The first striped bar to the right represents what the CPI would register if we matched the 1940s rise. It would hit 19% by 2014. (Yes, the CPI has been tinkered with many times, but this is at least what "unofficial" or "authentic" inflation would register.)

In 1945, the official inflation rate was 2%. It accelerated to 14% in 24 months. If we matched this percent rise, we'd hit 15% by 2014 (middle striped bar)..

And the example that kicked off the greatest bull market in gold and silver, the early 1970s. The CPI stood at 3.2% in 1972, a level close to ours today. It soared to 11% just two years later. Mimicking this rise, the third striped bar shows we'd also be at 11% in 2014. (Shadow Stats says we're already at 10% based on 1980 methodology, so from this level we'd hit 17% in 24 months.)

Could we really have price inflation that high within two years? Consider the following:

  • Fox Business reported on March 7 that "wages grew much more quickly at the end of last year than originally estimated..." This is an important data point because most economists believe you can't have higher inflation without rising wages.
  • Home-building permits are at their highest point since October 2008. Existing home sales fell 0.9% last month, but that's after January sales were up 4.6%.
  • Jobless claims are coming down, retail sales gained the most in five months, and auto sales were up 16% last month. One report I read stated that we've had 24 consecutive weeks of stronger US data.

If the economy continues to improve and more money is sloshing through the system, it's easy to see how inflation could grab hold. Yet, if you understand Austrian economics, you'll look beyond how the mainstream views inflation and to its root cause: monetary debasement.

  • According to ISI Group, there have been an incredible 122 "stimulative policy initiatives" from central banks around the world over the past seven months.

Remember, in these historical examples, price inflation was initially low and therefore off everyone's radar. But government tinkering with the monetary system lit the spark that led to a sudden and rapid rise in price inflation. It caught many off guard, just like I suspect it would now. Don't think there are no consequences to our unwise fiscal and monetary course; a potentially ugly tipping point is more likely than not at some point.

Given the abuse most fiat currencies are undergoing around the world today, coupled with obscene amounts of deficit spending, I think gold should be viewed not just as a potential moneymaker but as protection against the rabid price inflation that will invariably damage our economy and dilute our pocketbooks. If you think price deflation is next, I'll accept that argument - for a time - if you accept mine, that the Fed would almost certainly panic at another “deflationary” event and print to the max. This is why we're convinced that inflation, à la currency dilution, is inevitable...

To those of you who say gold hasn't always kept up with price inflation, don't kid yourself about what it would do in a highly inflationary environment: it would surely climb like it did in the 1970s. And those "productive assets" Warren Buffett prefers over gold? They would have a difficult time raising the prices of their products quickly enough to keep up with a rapidly escalating CPI. Gold may not perfectly track price inflation when it's low, but it is precisely a high-inflation environment where it serves one of its core purposes.

You may think high price inflation is further away than 2014, but don't dismiss the fact that it can happen suddenly. And keep in mind the possibility that a sudden shift in price inflation - especially expectations of price inflation - could be the spark for a mania in precious metals...

If we match the inflation rates seen several times in the recent past, what will your savings be worth in a few years? We'll have lots to worry about in a high-inflation climate, but our purchasing power can be protected by owning gold.

Jeff Clark is a Senior Precious Metals Analyst for Casey Research 



  1. the drunken watchman27 Mar 2012, 12:22:00

    Doug Casey has been runing this scare line for more than 30 years. It's how he sells his newsletters.

    If he is right, presumably we would expect to actually see it happen at some stage?

  2. The title of this post says:

    What could inflation look like in 2014

    What is this?

    Step 1). Is it a prediction/forecasting?

    If Yes to Step 1), then proceed to Step 2) otherwise proceed to Step 3).

    Step 2) If it is, then what was it based on?

    Was it:
    a) a Hunch?
    b) revealed by Past data (then extrapolate into the future from that)?
    c) a dream where an angel appeared and told Jeff Clark about it in his sleep one night?
    d) a rough estimation by using some sort of graphs & trend-analysis?

    Step 3) Was it based on some experts' opinions?

    If yes to Step 3), then proceed to Step 4), otherwise proceed to Step 5).

    Step 4): It was based on what others were saying such as Dr. Yaron Brook, Peter Schiff, Dr. Nassim Taleb, Prof. Ben Bernarke, Prof. Bernard Hickey, etc...

    Step 5): It was based on some mathematical algorithm.

    If you reached Step 5), then Congratulation! Please loop-back up to Step 1) and start all over again and execute the algorithm, since the author here, Jeff Clark is deluded by making forecasting into the unknown future.

  3. @Falufulu Fisi: Yes, very good.

    Except it's not a "forecast" of the likes that mainstream economists issue: you know, that GDP will be x or y to three significant digits by Easter weekend based only on statistical correlation.

    It's an analysis based on cause and effect, if you like, with historical evidence to support it: that if you pump up the money supply it will eventually come out in prices; that if you pump it up enough there will eventually be a slight to real assets.

    Analysis like this is inductive, rather than just correlative. It tells you that, in a given context, this will tend to happen because of that--but it doesn't even pretend to tell you when precisely, nor to how many significant figures.


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