The Inflation Quandary – Why it May Be Here to Stay

By Preserve Gold Research

Last year, US consumers watched helplessly as the ravages of inflation sent prices for essential goods and services soaring. Food prices climbed by 9.9% while the cost of gasoline soared by more than 33% in the wake of the pandemic-induced recession. Despite the Federal Reserve’s repeated attempts to assuage public concerns by pointing to the transitory nature of inflation, it wasn’t long before the Fed had to face the facts: inflation wasn’t going anywhere anytime soon.

The Fed’s so-called transitory inflation theory was based on the idea that rising prices were just a temporary consequence of the stimulus measures and economic reopening during the pandemic.  For many though, including former Secretary of the Treasury Larry Summers, this theory was fundamentally flawed. Summers argued that the massive stimulus packages passed by the federal government to prop up the economy had provided a fiscal shock that would be felt for years to come.

Pointing to historical instances when the government implemented significant interventions to modify economic conditions, he remarked that the Federal Reserve’s suggestion that rate hikes would probably not be necessary was premature.

“It’s been a long time since we learned the lesson, but if we set off a significant acceleration of inflation and it then forces a response by the Fed, the process is unlikely to be controllable, and recession is very likely along with big increases in mortgage rates,” Summers said.

Today, the Fed’s transitory theory lies in tatters, and Summer’s prediction rings truer than ever. While inflation has shown signs of moderating in recent months, many of the underlying causes of inflation remain firmly in place. With the Fed’s balance sheet continuing to swell and the US government running an annual deficit exceeding most countries’ GDP, an era of chronically elevated inflation could soon be a reality, according to some economists.

Core CPI Remains Stubbornly High Despite Moderating Inflation


Though the annual increase in U.S. consumer prices slowed to 4.9% in April, the core CPI (Consumer Price Index) increased by 5.5%, after rising 5.6% in March. Core CPI, which strips out food and energy prices, is closely monitored by economists as a measure of underlying inflationary pressure in the economy. Most notably, it excludes the volatile prices of energy and food, which are more responsive to external factors and economic fluctuations.

While the Fed has been eager to point out that overall inflation is slowing, the core CPI remains stubbornly high — a sign that inflationary pressures remain entrenched in the economy. A closer look into the primary drivers of the moderating inflation numbers shows that the drop is largely attributable to softening oil prices, which have plummeted by over 20% in the 12-month period ending in April. Unfortunately, oil prices are a notoriously fickle factor and any rebound in prices could quickly reverse the trend of moderating inflation according to analysts.

In response to declining oil prices, Saudi Arabia and other OPEC+ members recently announced plans to cut oil output by 1.15 million barrels per day from May through the end of the year. The cuts are in addition to the already agreed-upon production cuts of 2 million barrels per day, and represent a major shift in oil production policy. While the cuts are likely to put a floor under oil prices in the short term, analysts worry that the move could be a significant contributor to inflation in the medium term, as it will likely lead to higher prices for oil and its derivatives.

The effects of the production cuts on oil prices have been largely offset by the White House’s decision to tap into the US government’s Strategic Petroleum Reserve. The reserve, which held nearly 700 million barrels of oil a decade ago, has since dwindled to just 370 million barrels, their lowest level in nearly 40 years. The move is seen by some as a last-ditch effort to help tamp down oil prices in the short-term but with reserves running dangerously low, the government may soon find itself unable to continue intervening in oil markets.

While the Strategic Petroleum Reserve has helped to stem the tide of rising oil prices in the short term, its depletion could have serious implications for the Fed’s ability to keep inflation in check over the long term, according to analysts. Without a buffer of reserve oil to draw upon in times of need, the White House will be left with limited options in the case of significant swings in oil prices, leaving consumers exposed to the vagaries of an unpredictable market.

Walking a Tightrope – The Fed’s Delicate Balancing Act


As the steward of the nation’s monetary policy, the Fed now finds itself on a precarious tightrope, striving to maintain equilibrium in an ever-changing economic landscape. With the constant interplay of factors such as inflation, employment, and economic growth, the Fed faces the intricate challenge of striking the right balance to ensure stability and prosperity.

If the Federal Open Market Committee (FOMC) fails to adequately respond to shifting conditions, the U.S. economy could find itself in a situation where chronically elevated inflation becomes the new normal. However, if the Federal funds rate is hiked again in July in their ongoing quest to bring inflation back to the 2% target level, the Fed may find itself in a different kind of predicament. Even a modest quarter-point hike could, according to some analysts, stifle growth and exacerbate the already precarious state of the U.S. economy. If the FOMC does decide to raise rates next month, the Fed funds rate could be pushed above the peak of the previous cycle in 2006, when it reached 5.25%.

It was this kind of unchecked rate hike that led to the financial crisis in 2008. But today’s economic environment is markedly different than it was 12 years ago. Government debt stood at 63.8% of GDP in 2008; fast-forward to 2023 and that figure is closer to 130%. Household debt now exceeds $17 trillion for the first time ever, after posting the largest quarterly increase in two decades during the last quarter of 2022. Meanwhile, revolving credit outstanding climbed by over $17 billion in March, a staggering 17.3% year-over-year increase and one of the largest monthly jumps on record. Historically, credit card balances tend to decline during the first quarter of the year, but consumers have grown increasingly reliant on borrowed money to bridge the gaps in their income.

With consumer spending showing no signs of slowing down, and with debt levels at record highs, the Fed is quickly running out of room to maneuver. The Fed’s interest rate hikes have done little to curb consumer spending so far and revolving credit continues to expand at a rapid clip. As the expansion of the money supply continues to outpace economic growth on the back of increased consumer borrowing, the central bank’s fight against inflation may become a battle it can no longer win.

High Inflation, the New Norm?


While the Fed has signaled that a pause in rate hikes may be in the cards, inflation remains well above the 2% target level. If the Fed does decide to hold off on rate hikes, it risks allowing inflation to run unchecked, potentially setting the stage for a new period of high inflation. A premature pivot away from their current hawkish stance may be seen as a signal that the Fed has lost control, which could have serious implications for the stability of the U.S. economy in the long run.

“People will say the Fed isn’t serious about fighting inflation. Markets will assume inflation is coming back,” said David Rubenstein, the billionaire co-founder of the private equity firm The Carlyle Group.

Expectations of future inflation can become self-fulfilling. If businesses and consumers anticipate higher inflation, they may adjust their behavior accordingly according to economic theory. Businesses may raise prices in anticipation of increased costs, while consumers may increase spending to hedge against future price increases.

On the other hand, if the Fed hikes too aggressively, it risks choking off economic growth and potentially triggering a recession without fully addressing one of the leading causes of rising prices — the expanding money supply. With parts of the U.S. economy already on fragile footing and the Fed’s policy instruments growing increasingly limited, the central bank may soon be forced to accept high inflation as the new norm.

Fortifying Your Finances – How Precious Metals Can Help


In the midst of inflationary challenges and growing fears of economic instability, precious metals have become a popular choice for individuals and institutions alike. Demand for gold posted a first-quarter record this year, while demand for silver and platinum have also surged amid growing deficits.

Precious metals can provide a layer of protection against inflation, as the prices for these metals tend to move inversely with the dollar. Unlike fiat currencies, which are often subject to devaluation due to inflationary pressures, precious metals can act as a hedge against a weakening currency and rising prices. Their limited supply, tangible nature, and intrinsic value make them particularly appealing to individuals and institutions looking for ways to fortify their finances during periods of economic uncertainty. “When economic uncertainty looms, gold can provide stability and maintain value as it typically has an inverse relationship with traditional assets like stocks and bonds,” says Andrew Latham, a certified financial planner.

As the Fed continues to grapple with inflation and the limits of its policy tools, many experts suggest allocating part of their savings to precious metals. In uncertain times, these timeless assets can help investors hedge against the threats of inflation and economic instability and diversify their assets to mitigate risk.

Are you concerned with’s the Fed’s policy and grappling with inflation?

Call (877) 444-0923 to speak with a Gold and Silver specialist today.

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