The first sub-3% inflation report in nearly 4 years is a much-needed bit of good news. Today we take a deep dive into the disinflationary forces at work in the economy. Turns out that the American family is on the brink…
From Peter Reagan at Birch Gold Group
As reported in the July 2024 official update, the annual rate of inflation has finally eased below 3% for the first time in four long years. According to the Bureau of Labor Statistics, the consumer price index rose only 2.9% over the last twelve months.
It’s been a historic and brutal 39 months since the CPI came in below 3%.
That’s a welcome piece of good news. Although prices are still increasing, they’re going up more slowly.
Today I don’t want to quibble about inflation measurements. My objections to the shortcomings of the government’s “new and improved” methods of capturing price increases are already on record.
Instead, I want to ask a question. Why is the rate of inflation subsiding now?
What changed?
And did it change for the better?
What causes inflation in the first place?
Let’s set politics aside – although that’s a challenge in economics, where it seems like analysts see everything through partisan-colored glasses.
Prices are set by supply and demand. Ron Paul does a great job of explaining how prices work here.
The purchasing power of the dollar works similarly. When there are more dollars in circulation, the purchasing power of each declines – and prices rise. That’s inflation. Price increases caused by reduction in purchasing power, which is only caused by increased currency circulation.
Even the phrase “increased currency circulation” has two separate parts:
- The quantity of currency (including credit)
- Its velocity, or much spending is going on
Even when the quantity of currency is fixed, if velocity is high, there’s a lot of spending going on. That economic activity can be inflationary.
The opposite is equally true. Regardless of the amount of currency in circulation, spending reductions are disinflationary.
Well, there’s still $21 trillion total, down about 5% from its absolute peak in 2022. So why is inflation slowing down?
American shoppers going on strike
A recent AP News piece followed the tired Biden administration’s “greedflation” gaslighting. After that nonsense, the article did give us an actual clue:
The reluctance of consumers to keep paying more has forced companies to slow their price increases – or even to cut them. The result is a cooling of inflation pressures.
On Monday, the Federal Reserve Bank of New York reported that Americans’ expectations of how much they’ll spend in the next 12 months has declined – and so has their outlook for inflation.
In other words, shoppers are going on strike. Refusal to pay high prices means prices subside. This is a perfectly rational response to price increases, by the way! No government meddling required.
Less spending means less inflationary pressure – and a slower rate of inflation.
One thing, though – a growing number of families are refusing to pay high prices simply because they can’t…
Are American families going broke?
The recent decade has brought attention to a new type of “phantom debt” that people are using to buy some goods and services.
This newer form of debt is officially called a “buy now – pay later” (BNPL) loan.
A recent CNBC article summarized a dramatic spike in this newer type of debt that started to occur just before 2021:
The number of buy now, pay later loans increased nearly 1,100% between 2019 and 2021, according to data compiled by the Consumer Financial Protection Bureau.
You can also see how the trajectory accelerated after the COVID panic started in March 2020 from the data that was graphed in a CFPB report:
The nation’s BNPL balances are piled atop an already spectacular heap of credit card debt. Over the last four years, as inflation destroyed our purchasing power and sent prices soaring, cash-strapped families resorted to credit cards just to pay for groceries and gas.
USA Today recently profiled summarized this credit card carnage:
The situation has left nearly six out of 10 (58%) without a plan to pay off their credit cards…
“Since the beginning of 2021, credit card balances have been off to the races,” Ted Rossman, Bankrate’s senior credit card analyst, said in the survey report. “High inflation and high interest rates have eroded Americans’ savings and more people are carrying more debt for longer periods of time.”
Don’t make the mistake of ignoring this trend.
Even if you’re doing well, even if your costs are under control and you’ve managed to stay out of debt (congratulations, by the way. That’s quite an accomplishment these days!)
The overall state of the American household matters to the entire economy. Here’s why.
In his latest update, Charlie Bilello asked an important question that ties together everything we’ve discussed:
What would push the economy into a recession?
Weakness in the US consumer which accounts for roughly 70% of GDP.
What’s been keeping many of those consumers afloat in recent years is rising credit card debt, which hit a record $1.14 trillion in the 2nd quarter. That was an increase of 10.8% from the year before.
You can see the last 24 years of consumer credit usage reflected on the graph below. Note that decline, from 17.2% to 10.8% is not a reduction in balances! This chart simply shows the year over year change:
You’ll notice that people had (at one point) started paying off their balances between June 2020 and March 2021. Those stimmie checks were good for something! But the free money didn’t last, and prices surged, and Americans started pulling out the plastic again.
But the drawdown is easily explained by the COVID stimulus checks and extra unemployment benefits that were paid in 2020 and 2021. That money was obviously being used by consumers to pay down their credit card debt.
Unfortunately, that situation changed dramatically when stimulus checks and extra unemployment benefits dried up, as Charlie also pointed out:
…more alarming has been the upward trend in delinquencies. 11% of credit card balances in the US are now 90+ days delinquent, the highest since 2012.
Credit card balances are still growing, but the pace is slowing down. Meanwhile, credit card bills are going unpaid at a 12-year record pace.
In fact, things are getting so bad right now that one credit card consolidation company shut down without warning. Folks, you know the economy’s in bad shape when a credit card consolidation company can’t even keep the lights on…
This spending isn’t just consumption. Consumer spending means jobs for people in manufacturing, in transportation, in hospitality and construction and just about every industry.
If consumer spending keeps slowing at this pace, the economy will grind to a halt. And we already know spending can’t continue because of the balance delinquencies. As a nation, we’re in a tight spot…
Diversifying your savings with real money
Back in the 1920s, Weimar suffered a major hyperinflationary period when its paper money became worthless in response to severe economic collapse.
People even resorted to burning money just to keep warm, because it was pretty worthless otherwise.
The good news is, there is an asset that could help you form a safety net if a severe recession results from the current economic issues. In fact, we’ve devoted an entire education page to it.
More and more people are considering this asset (which as you already know by now, we are talking about physical precious metals). Here’s legendary investor Jeff Gundlach’s take on the importance of “real money”:
I think there is just growing awareness that developed country governments are completely out of control.
I feel like the average person is starting to realize the gravity of this problem… that we are running on a debt-based scheme with no end in sight. And I just think that people are starting to think that “Maybe I should own real money.“
That’s because precious metals like gold and silver have been a stable store of wealth for thousands of years. We call them safe haven investments because they can’t be depreciated or inflated away like currency, and because they hold their value very well over time. During recessions and crises, their prices tend to surge.
If you’re concerned with wealth preservation (and you should be!) I strongly suggest you take a moment to learn more about the benefits of owning physical precious metals.