Inflation Run: Remember Fed’s Inflation Approach in 1980? Will it Run Away Again?

Extraordinary times often make us lose sight of historical norms. In the 1940s, inflation averaged around 4.9%, in the 1970s it ran at about 7.25%, and then in the tumultuous summer of 1980 inflation exploded to 14.5%. Who can forget the result of that intense inflation run: soaring prices of cars, clothes and shoes in what seemed like mere weeks!

For the 12 months ending in July 2020, the inflation rate hovered at just 1.0% … well below historical averages. Ultra-low inflation suggests a weakening demand for products, goods and services. It can lead to falling prices, sinking profits and plummeting wages. Then, in the wake of the COVID-19 shutdowns, Federal Reserve Chairman Powell announced a major policy shift — the central bank will now allow inflation to run higher than normal to support the labor market and economy.

Despite establishing a 2% benchmark in 2012, the Fed’s recent move will allow inflation to rise above this level “for some time,” even for periods when it has historically run below that objective. I’m not the only person who is concerned what the effects of this artificial inflation run could be.

Inflation is a thief. It raises the cost of living — creating pain at the supermarket, the gas pump and the local dollar store. High inflation leads to higher interest rates, less money in hand and a weaker return on investments.

When prices dramatically increase and the nation experiences hyperinflation, the Federal Reserve prints even more money to help overcome it. The problem is that this tends to noticeably devalue the U.S. dollar, which means our dollars buy even less.

Gold has Been Used as a Hedge Against Inflation

Over the years, many investors have turned to gold as a hedge against inflation, because its value tends to increase as the purchasing power of the dollar decreases. No one knows what will happen next or how far this inflation run will go, but Americans deserve the peace of mind they can find with tangible alternative assets such as physical gold and silver.

To learn more about using gold as a hedge against inflation, sign up for an Augusta Gold & Silver Web Conference with Devlyn Steele, Augusta’s director of education. Devlyn and the rest of the Augusta education team is standing by to teach Americans about Federal Reserve policies, how inflation works, and how to offset the negative effects of potential economic stresses with physical gold and silver.