Inflation Is Coming

Sprout Money's picture


People following the markets are a bit uncomfortable at the moment. Especially the abrupt drop in the technology sector is turning stomachs left and right. Volatility has returned it seems, and there is no denying that the way down travels faster than the way up.

Another trend we spotted was that a lot of capital is flowing out of technology into big caps, and at Sprout Money we always try to look at the big picture.

  • Why is this happening in the market?
  • Did something fundamentally change?
  • Is something going on in the background?

We do assume that we are in a transitional phase at the moment and as you probably know already, every market transition is accompanied by strong waves. What is going on then? Well, there is evidence that inflation is coming back, and we already had a taste of it with the jump in the gold price over the course of the first quarter of 2014. Most market watchers believe that gold was on the rise because of geo-political tension, but that is never the most important driver for gold.

Ultimately, inflation powers gold and nothing else!

With a little bit of investigation and research, it would be hard to not conclude that the inflation rate is going to be on the rise over the coming months. It does not require a science degree to figure out how the subparts of the official measure of inflation (the Consumer Price Index) are behaving as well.

The composition of the CPI (consumer price index) is as follows:

CPI components pie-chart

Source: Doug Short

In this diagram you can see clearly that the most important components are Housing, Transportation and Food & Beverages; together responsible for about 73 percent of the inflation rate! Of those three parts, only Transportation has not increased year-on-year. Food & Beverages, however, has gone up by a lot…

CPI food beverages chart

That should not come as a surprise to anyone. The prices of grain, coffee, meat, etc. have gone through the roof over the first quarter of 2014.

And then there is Housing. Although that component encompasses different things, the most important are real estate prices and rent. You have probably heard that the US real estate market is making a comeback, but rents are on the rise as well.

CPI rent chart

Do you see any sign of weakness in the above chart? We most certainly do not.

Even components in which you could notice a constant price decrease over the last few months, like information technology, are reversing.

CPI technology chart

You can see already where this is going: those who want to know where inflation is headed in the coming months simply need to look at its most important components. And most of these components are indicating an increase in the inflation rate. Gold has a head start already, as it is the ultimate monetary watchdog that can smell an increase in the inflation rate from miles away!

Now, if you listened carefully to the Fed over the last couple of months, you would have noticed inflation taking up a more prominent position in monetary policy as well. At the moment the inflation target is 2 percent, but Janet Yellen already indicated on multiple occasions that she would tolerate a higher inflation rate for an extended period of time to get the US growth engine roaring again. If we know one thing it is the following: NEVER fight the Fed!

If the Fed wants inflation, the Fed will get inflation. Mark our words.

Regular readers will remember that we indicated last year that tapering would be the Fed’s crutch for raising inflation. It was (and is) a controversial thought that was not received well by everyone, but it is the scenario that is playing out in front of our very eyes today.

The Fed is slowly turning off the printing press, and what do we see? Price increases over the whole spectrum.

The balance sheets of banks have been growing with freshly printed money from the Fed for years now, and 4 billion dollars have been injected already. That money will only start to work if the Fed stops bottle-feeding the banks. And then, all of that money will get shoved into the financial system by a factor of 10X (and more)! Do not forget that we still live in times of fractional banking.

We are very clear about this: a monetary avalanche awaits. Never before has a monetary operation of this scale been done as on other continents there are also billions of euros, yens, pounds, etc. ready to go to work. Fear (with baited breath) the moment this monetary snowball is unleashed.

Yellen wants inflation? Yellen will get inflation, and a lot of it, no doubts here. That is why we cannot emphasize the importance of gold as a component in your portfolio enough. Gold is the ultimate hedge against inflationary forces that are embedded in the system. Why? Simple. Gold flourishes in an environment of negative real interest rates, because only then financial products with fixed income (like bonds) do not generate any profits or protect capital. In a situation like that, money takes the path of least resistance: gold!

To get to negative real interest rates, you need the inflation rate to be higher than the nominal interest rate, and the current low interest rate policy from the Fed will remain unchanged for a good while. Only when inflation becomes a persistent problem, the Fed will fight back with interest rate policies but that will not be a topic for a long time… The CPI has to go north of 5 percent to get the Fed to hit the emergency brakes and today, the CPI is at a mere 1 percent.

USA inflation rate chart

We are also completely convinced that the Fed has no issues with a higher gold price whatsoever. Even more, the Fed would love a higher gold price as it would be a confirmation of the effectiveness of their monetary policy!

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GreatUncle's picture

Is inflation coming?

Way back in the 70's that slump and all the slumps before the central bankers pumped the money into the system to prevent the deflation. The problem for central bankers is now with so much debt out there and to pay the return expected on the debt you got to create greater amounts of paper along the lines

1 trillion dollars of stimulated inflation is not going to be enough to pay the intetrest on the debt so instead ...

We get 4 trillion dollarts of banker stimulated infloation ... aaaaah feels good economy safe.

The poorest get crucified with no assets as the system inflates out of control.

So yeah inflation is coming it is the only way to put the level of debt under control but the rate needed will be far greater than people expect, IN REALITY IT IS THE ONLY ECONOMIC TOOL THAT WAS GOI?NG TO SOLVE THIS.

The defllation being thwarted is the efficiency of the system where if everybody ends up on the minimum wage all the prices will reset to be affordable on the minimum wage --->>> That's deflation and no market force can prevent it other than a central banker using inflation to fill the gap between deflated price and the current market price.

So who wants to kill a banker first? Chips down this is the future reality for you in this banker controlled economic paradise created by them for themselves and a tale of 2 halves those with everything and those with nothing.


Dingleberry's picture

Inflation....what the fuck?

Ever hear of hedonic adjustments?

There won't be any "inflation" until wages start to rise.

Then you will see all kinds of wailing and gnashing of teeth from the fed and assorted CNBS pundits. 

Until then, let the asset bubbles continue to blow!

AdvancingTime's picture

The modern economy that has evolved over the last several decades is loaded with interwoven contracts reeking of contagion. I contend that if faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar.

In a recent article I wrote "never before has mankind diverted such a large percentage of wealth into intangible products or goods and made the claim this is the primary reason that inflation has not raised its ugly head or become a major economic issue in recent years." Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply. the article below delves into an inflationary collapse.

moneybots's picture

"If the Fed wants inflation, the Fed will get inflation. Mark our words."


Inflation is the cause of deflation.  Why is the FED trying so hard to produce deflation?

daveO's picture

They're trying to reinflate the credit bubble they created in housing. Inflation is a reflection of the credit bubble. Deflation is a reflection of the bubble collapsing. With incomes down, there is no way to recreate the credit bubble. The funny money they have given the banks will eventually find it's way into hard goods of all kinds. If the FED stops paying(they shouldn't have been allowed by CONgress to do it) interest on bank deposits(.25%), the avalanche begins!  

moneybots's picture

"If we know one thing it is the following: NEVER fight the Fed!"


The FED had an emergency rate cut of 1/2% right after new years day in 2001, followed by another half percent at the regular meeting.

The stock market dropped for 1 year and 9 months afterward.  So much for "don't fight the FED."

daveO's picture

Gold was $271/oz. back then. Now, it's nearly 5 X's higher. The stock market is a credit/earnings related asset. It peaked out a year before that, as I remember. I sold all my stocks the same week Janet Reno sued Microsoft in March, 2000. The FED gets what they want, in time. It's marathon, not a sprint.  

semperfi's picture

The author has been brainwashed like almost everyone else into believing the govt numbers.  Anyone who believes and/or quotes the govt numbers is brain dead.  The real inflation rate per Shadow Stats is somewhere around 8% or so and has been for a long time.

Thalamus's picture

Housing is the Fed's main concern, which is in deflation mode and will continue to be until it settles at its economic equilibrium.  Housing is a function of primarily earnings and interest rates.  The Fed has cranked the interest rate lever all the way down to inflate housing with little effect, but they can't help earnings directly and earnings have been dropping as those in the labor force fall off and food, health, and rent inflation reduce the amount a person can borrow.  Since the interest rate lever is wide open, and real per capita earnings are decreasing, the only answer for housing prices are lower and lower (deflation).  Thus, the net equity of the US banking system will go from currently negative to very negative in the future and result in the collapse of the banking system (thank you FASB).  The banking system has  $1 of equity for every $10 of housing and other loaned out assets on its balance sheet.  If its assets (loans) decrease 10% then all the equity of the banks are wiped out.  This has already happened but thanks to FASB banks don't need to mark to market their loan portfolios so it appears they are solvent.  As these loans (assets) are turned over it will become apparent that the emperor has no clothes and the mobs will pull their money out of the financial system; or, the banks will do a bail in before this happens and put up strong currency controls to eliminate the mobs power.   

AdvancingTime's picture

The more and more I study derivatives it now appears the main goal of QE may have been to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy. QE has up to now stopped an implosion of derivatives and the resulting contagion and shock that would have spread throughout the financial system.

Paul Wilmott from Oxford University estimates the derivatives market at $1.2 quadrillion, to put that in perspective it is about 20 times the size of the world economy. The point of the article below is to call attention to the insanity of derivatives as an instrument or tool to add stability to our financial system. By stacking risk upon risk and transferring it off to another party who may not be able to preform you do not increase stability.

moneybots's picture

"Housing is a function of primarily earnings and interest rates."


And student loan debt.  Someone $25,000 in debt as they throw their cap into the air, isn't likely going to be buying a house anytime soon.



quasimodo's picture

I read the title and thought surely I was going to read a fringe article from the roaring 20's.

Bloodstock's picture

Inflation is coming? Uh, maybe the author hasn't been to the grocery store for last year and a half! Geesh! It's here, it's getting worse!

centerline's picture

Using terms like inflation in any classical sense is just more bullshit for idiots.  This is a monetary end game.  This is the bursting of the ultimate ponzi (endless organic growth) in the context of a global economy across multiple currencies.

First, study the collapse of the Roman Empire.  Then, magnify it to a degree that makes you want to pee yourself on the spot.  Then layer in cheap energy.  And...  you get the idea.

Ban KKiller's picture

Inflation is here. 

What are the goals of the FED? Pushing the wealth to the top seems like it will end in revolution, according to history anyway. 

Hard assets do protect.

new game's picture

inflation is what is left for the plebs after the banker skim off billions for a life of luxury. inflation, pfff!, so fucking what that is a worry for the poor...

RaiZH's picture

No $273 per ounce gold? Nice.