Inflation Expected to Remain Low: Why This Won’t Hold True

Inflation Remain LowOn May 11, 2015, the Federal Reserve Bank of New York released its survey of consumer expectations. The results from about 1,200 respondents suggest that the expected inflation in the next few years will be soft. (Source: Federal Reserve Bank of New York, May 11, 2015.)

According to the survey, the coming one-year expected inflation is 2.7%. This is the lowest level since the beginning of the rotating survey in mid-2013. The median three-year expected inflation is 3.0%.

In the survey, they found that consumers have lower gas price expectations. Indeed, gas prices have been at very low levels since last summer. The survey also found that household spending growth is not optimistic in the year ahead: at 3.8%, this could indicate consumers’ lack of confidence in the growth prospects of the U.S. economy.

Misleading Inflation Numbers

The survey’s soft results on expected inflation could be misleading.

Most measures of inflation, like the Consumer Price Index (CPI), place significant weight on gas and housing costs. These two factors are not experiencing that much growth these days; gas prices have remained low since last summer, and there is a limit as to how much higher rent can go up each year. Gas and housing tend to offset the dramatic increases in other areas.

As an example, the official inflation between February 2014 and January 2015 was negative 0.1%, meaning there was actually deflation (the period when prices decline). However, if you look at the food and beverage sector, you’ll see that their price has actually increased by 3.0%. The cost of meat, poultry, fish, and eggs has gone up an astonishing 7.3%. So, don’t be fooled by the CPI number. (Sources: Bureau of Labor Statistics, last accessed May 11, 2015; Federal Reserve Bank of St. Louis, last accessed May 11, 2015; Federal Reserve Bank of St. Louis, last accessed May 11, 2015.)

Printing Money Leads to Price Inflation

What I am mostly worried about is the amount of money that has been printed since the Great Recession. Since 2008, the money supply has increased by 67%, or more than $5.0 trillion!

It is expected that more money being pumped into the economy will cause price inflation. When there is a lot more money chasing the same basket of goods, each good in the basket will command a higher price. Although we have still yet to see money printing being translated into price inflation at the full scale, it is something that is imminent.

If prices rise, expect your spending power to plummet and your wealth to deteriorate. To preserve wealth, there’s a solution; gold. The yellow metal has proven over and over again to be a great hedge during times of rampant inflation.